Payment Terms, Business Administrations in Australia Plunge, Data Reveals

Payment terms continue to decrease in Australia, according to CreditorWatch’s Business Risk Review Report for October 2020. In the same manner, business administrations fell. While these may be encouraging signs that the economy is improving, payment times remain 157 per cent higher, on average, the report noted.

Payment Terms, Business Administration Decrease

In early September, the Morrison government extended trading relief to 2021 in a bid to prevent further job losses. Payment terms, according to CreditorWatch, have improved since the announcement of the extension of the trading relief. More businesses took the business administration route in September before the further extension of the trading relief laws. Businesses finally made the decision that they are no longer viable, even with government relief. At best, JobKeeper and other stimulus packages gave a mere life support.

“The fact that payment times remain so high and above their 2019 levels, gives the game away while falling administration rates show that government stimulus packages have created a backlog of companies holding on to survival.

“When this support is withdrawn next year, we expect many of these businesses to shed their camouflage and shut up shop because they do not have the cash flow to survive on their own two feet,” CreditorWatch chief executive Patrick Coghlan said.

RBA expects thousands of extra business bankruptcies

The Reserve Bank said the new government supports had reduced the number of business failures by about 4,600 and would rescue more than 10,000 firms in total. However, the current federal budget, which shifted away from supporting unviable firms and instead offered tax relief for businesses that have a better prospect of surviving in the new COVID-19 economy.

Industry experts say thousands of small businesses could still collapse because they are unlikely to be able to pay employee entitlements required under the Morrison government’s proposed new insolvency restructuring laws, the Australian Financial Review said.

The RBA’s biannual review has estimated that if the aggregate 3 per cent decline in 2019–20 revenue fails to recover in the current financial year, a further 5,200 businesses will fail in addition to the typical 15,000 to 20,000 firms that collapse each year.

“Business failures will increase, although there is a high degree of uncertainty about the magnitude and timing,” the RBA said.

“It will depend on the strength of the economic recovery, which will be influenced by the duration and severity of future COVID-19-related disruptions, and the timing and extent of the unwinding of the various support measures.

“Bankruptcies and insolvencies are currently very low because of the income support, loan repayment deferrals and temporary insolvency relief.

“Business failures have flow-on effects to their creditors, both financial institutions and other businesses, and their employees.”

Payment times decrease in some sectors

Payment time is an indicator of how tough the environment is for businesses. According to the CreditorWatch report, the worst performing industries in terms of payment date were the following:

Health Care and Social Assistance43 days
Arts and Recreation Services31 days
Financial and Insurance Services45 days
Wholesale Trade30 days
Other Services61 days

The report also showed that most states recorded falls in external administrations when compared to September, in line with the national trend:

  • New South Wales recorded a 36.7 per cent decrease in business administrations
  • Victoria recorded a 14.8 per cent decrease in business administrations
  • Queensland recorded a 15.0 per cent decrease in business administrations

Early payments, including those below 30 days, are the ideal payment method for business owners. The efficiency of debt collection depends on the payment terms on an invoice. Thus, the more delayed customers pay invoices, the tighter the cash flow becomes. To address this, the government will roll out the payment transparency law in January.

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