New data shows increasing numbers of firms defaulting on their debts as interest rates and supply pressures rise.
Tourism, retail and construction businesses are most vulnerable to closures as the sectors lead the way in credit defaults, new data shows.
Credit rating firm Centrix says company closures increased 8 percent in the June quarter and credit defaults rose 6 percent over that time. Company closures had been falling after a spike in September last year, but have been back on the rise since April.
Meanwhile commercial credit defaults have continued to rise for about a year, with the average business default being around $4000.
Credit is crucial for small businesses, Centrix managing director Keith McLaughlin says, as it allows businesses to make purchases in advance from suppliers, boosting sales. But if a large customer fails to pay their bill, the chain reaction could ultimately kill a business as it struggles to meet its own obligations, McLaughlin says.
ANZ chief economist Sharon Zollner says despite the bank’s business confidence survey showing increased confidence, certain industries are struggling with cash flow.
“It is a pretty stressful time for businesses and costs are rising.
“There is no question that there are cash flow problems for the likes of retailers having to do massive orders because they don't know how often ships are going to come or manufacturers missing important inputs and in the construction sector a shortage of building material,” Zollner says.
Centrix data shows about 45 percent of rental and property services were failing to pay their debts this year compared to 2019. For hospitality the rate was about 35 percent, for transport just under a third, while about 20 percent of construction and retail businesses were defaulting on credit.
Economists are also keeping a close eye on the hot construction market, Zollner says, as strong growth in the sector drove GDP for the first quarter up. Construction, in particular, tends to get itself in a rut when it is over-trading.
“Project delays and cost over-runs are likely as at the moment the chances of cost overruns and delays is definitely turbocharged by the shortage of material and workers and those risks can be difficult to control for.”
Australian fintech Prospa has been lending to small businesses in New Zealand for about two years. But with small businesses finding it difficult to get loans from banks, Prospa’s customer base in NZ doubled to nearly 12,000 last year.
Its manager director Adrienne Begbie says Prospa hasn’t noticed an increase in defaults, but a lot of its lending to businesses has been recovery-focused rather than for growth.
Prospa hedges its losses with real time data analysis of a business’ finances, she says, which determines how much it could afford to lend. It also bases its decision on the business’ performance three to six months before applying for the loan.
“It is usually a combination of factors that ultimately cause the company to go into liquidation. IRD starting to enforce the debt is a catalyst but it is common to see a number of other unpaid debts in the company.” – Steven Khov
Begbie says “time will tell” if the effects of supply chain issues and labour shortages are felt on small businesses, but so far most have adapted to operating at lower capacity.
Prospa’s Back to Business loans are between $100,000 and $300,000 over a fixed term of up to 36 months.
Centrix data shows the increased closures appear to have been voluntary, with Companies Office data showing liquidations falling by 33 percent over the past year.
Liquidator Steven Khov of Khov Jones says there has been a noticeable uptick in the number of liquidations. But he says this increase is likely due to Inland Revenue’s crackdown on companies not paying tax.
“It is usually a combination of factors that ultimately cause the company to go into liquidation. IRD starting to enforce the debt is a catalyst but it is common to see a number of other unpaid debts in the company,” Khov says.
“Usually the pressure of keeping the company alive has exhausted all the avenues of cashflow and funding for the company which inevitably results in the liquidation of the company.”
He says liquidations have been more common in the hospitality and tourism sectors over the past year. But how long this trend will continue depends on a number of external factors, including the changes to the OCR rate and whether landlords come around to dropping commercial rents and the wider supply chain issues.
Zollner says it's a constantly evolving picture.
"Cashflow is king. Credit is certainly something businesses are going to have to be aware of. At times like this when everyone is frantically busy and just trying to get stuff done, credit risk assessments can be one of those things that gets shortcut.
“It's a reminder businesses need to be aware of that risk.”
