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Credit insurance claims show businesses may not pull the plug

trade credit

An empty Bourke St mall in Melbourne’s CBD on October 13, which a year ago would have been bustling with people. Jason South

Article by Simon Evans, Senior Report at NCI Trade Credit Solutions

 

The boss of Australia’s biggest trade credit insurance broker says dire predictions about the number of businesses which might go bust may not eventuate, with trade credit insurance claims and debt collection actions at their lowest point in two years because of government subsidy programs.

National Credit Insurance managing director Kirk Cheesman says some extra insolvencies are likely early in calendar 2021 in what is seasonally a time when there is a spike in collapses anyway as business operators return from holidays, re-assess and ”hoist the white flag”. But the government stimulus programs and extra leeway in insolvency laws have done a good job thus far.

“It’s given businesses breathing time to continue to trade and not have the pressure on them,” Mr Cheesman said.

He said a reckoning may still be coming once the government programs like JobKeeper are fully wound down, but the situation at the moment was much better than had been forecast when national lockdowns began in late March. “I’m a little more optimistic,” he said.

Mr Cheesman said the current data on trade credit insurance claims, collection actions initiated, and overdue debt invoices across its 3,500 business clients are still tracking at reasonable levels and hadn’t blown out.

But the unknown factor was how many business operators were delaying what might be inevitable once the Government subsidies disappeared and leeway from banks ended. “What the government wanted to achieve, has been achieved,” he said.

He said it was likely that Victoria would become a hotspot for bankruptcies, particularly in the entertainment industry and non-food retail because of the length of time lockdowns had been in place.

“They’ve had the extended suppression on business activity,” Mr Cheesman said.

The Reserve Bank of Australia warned on October 9 that it was expecting a wave of business failures once subsidies ended. The RBA’s biannual financial stability review said COVID-19-linked government subsidies, up to $260 billion in bank loan repayment deferrals and rent waivers had increased business “cash buffers” since the COVID-induced recession struck in March.

Mr Cheesman said there would clearly be more insolvencies in 2021 than would occur in 2020 as the fall-out from the pandemic washed through the economy.

But he said the ”severity” of the level of insolvencies wasn’t likely to be as dramatic as some are expecting, and the 2021 figures may jump in part because some companies had merely put off a wind-up for six or nine months. “They end up in the pot next year,” he said.

NCI closely tracks the number of insurance claims and collection actions and said a tracking index they compile was at its lowest level in two years, and was currently sitting at historical ”average” levels.

The JobKeeper program and a temporary increase to the threshold at which creditors can issue a statutory demand on a company, along with the extra time companies have to respond to statutory demands they receive, have all helped.

Preliminary data from the Australian Securities and Investments Commission showed 244 companies had gone into external administration in September, well below the 685 which collapsed in the same month in 2019.

But he acknowledged there was a risk that overdue debts, the resulting credit insurance claims which followed, and overall insolvencies are being postponed rather than avoided.

It is a similar theme to data from insurance agency BizCover which showed cancellation rates for small- and medium-sized business policies have fallen to 1.5 per cent of all policies as of September, after spiking at more than 3 per cent in April during the initial lockdown.