Big Trouble For Small Business In Credit Fallout

BUSINESS failures have increased by 11% for the first half of this year, payment terms are at a seven-year high and traditional avenues of credit for small business are drying up, according to a report.

Small businesses are expecting a tough outlook with the credit squeeze and the falling dollar, but they are also worried where the money will come from in the run-up to Christmas, according to a business expectations survey update to be released by Dun & Bradstreet.

While problems in the US may seem distant to some businesses, the fallout is starting to hit home in Australia through a squeeze in cash flow and invoice payments averaging twice the standard 30 days.

Dun & Bradstreet in its June-quarter survey on business risks found that almost one in 10 businesses were at risk of financial distress. The most vulnerable group among them were those with fewer than four employees.

In separate D if they fund up to 60% of the loan valuation then they know they can still get their money back if the borrower defaults, based on the value of the asset.

Cash flow and debt collection are back on the radar but Hayes believes there can be a big cultural gap between companies with 10 to 20 staff and those with fewer than 10.

"Most businesses with 10 to 20 staff think cash flow is pretty important and they know who owes them money and probably have a management process in place. But those with two or three staff, then maybe they can't manage."

According to Ashley Sharma, national sales and marketing manager of Bibby Financial Services, there's been an increase in demand for debt factoring since August after a lull in July. Before that, there was a rush to debt factoring in May and June.

"Debt factoring is one of the fastest-growing industries and is a $60 billion industry globally to March 30, 2008, compared to $5billion 10 years ago," he says.

"The quality of inquiries is higher in terms of the size of businesses. We've noticed a big jump in larger companies between $60 million and $80million in sales turnover. Normally, this type of client would go to some of the top-tier lenders."

Sharma says one client with an overseas parent approached his company this week after the withdrawal of Societe Generale; the local company had to refinance and was seeking other options. Smaller companies were finding it hard to get payments out of clients, and this was causing a ripple effect. "Trading terms, on average, had been 30-45 days but now that there's less money to pay, it's going out to 55 and 60 days. Some industries, such as transport and printing, are blowing out from 75 to 80 days," Sharma says.

"We fund up to 90 days, so it's short-term working capital. Most people would consider over 90 days as delinquent, although we can give extended terms, depending upon the purchaser, such as government."

Sharma says there's an increased risk of non-payment, with liquidity drying up and some sectors already hard hit, such as transport, retail and manufacturing.

"I think we will see an increase in unemployment, which will fuel less demand and feed through the economy and become a recession. Two weeks ago, I may have said otherwise, but now, who knows? A lot has happened in the meantime and there's a higher chance of slowdown. We need to brace for the worst." But Hayes says it is too early for most small and medium enterprises to be reporting difficulties in getting funding from banks. "The banks are still lending but they're being selective about the terms and looking at the strugglers more closely and not extending further credit," he says.

"There's no doubt that cash is tighter in some situations; some things that were proceeding previously won't go ahead.

"The tightening of bank lending and their reviews mean that there will be some businesses falling over but these are probably marginal businesses that probably were going to fall over on a trigger event and this is it.

"For the majority, the impact won't be direct, but it will be a ripple effect of a larger company not proceeding and so, in a service sector, that ripple effect will kick in. You may be OK but you have to worry about not just yourself but your customers ... because they may owe you $25,000 or more and if they're in trouble, then they can't pay you. But we're not seeing that yet."