Commercial finance demand 'patchy', says CAFBA president
Business activity remains robust despite the pressures of inflation and rising interest rates, the latest CreditorWatch data shows.
CAFBA president Matt Atkin (pictured above left) said that businesses still had an appetite to borrow but were proceeding with caution.
In its March Business Risk Index, released on Wednesday, CreditorWatch said that business activity had rebounded to pre-COVID levels.
Credit enquiries, a leading indicator of business activity, rose 28% from February to March, and were up by 149% year-on-year, the credit agency said.
CreditorWatch CEO Patrick Coghlan (pictured above right) said the March BRI data, particularly the increase in business activity, was “an encouraging sign”.
“From a pandemic to labour shortages, supply chain disruptions, high inflation and rising interest rates, Australian businesses have had it all thrown at them,” Coughlan said. “To now be registering these increases in turnover is a very encouraging sign.”
As demand drops and cost pressures remain, Coughlan warned against ignoring economic forecasts for more tough times ahead.
Average trade receivables, described as the number of open invoices a business has on its books, sat at $122,223 in March, which was 8% below March 2020, CreditorWatch said.
Court actions were back to pre-COVID levels (up 22% year-on-year) and business to business trade payment defaults rose 20% year-on-year.
Atkin, who is also the managing director of Atlas Broker, told MPA that while businesses were still showing a healthy appetite for commercial loans, it was “patchy”.
He said that it was difficult to determine whether settlement volumes over the last quarter were buoyed by the pipeline, or new deals.
“Clients appear to be proceeding with caution at the moment with some clients shelving projects until they get a better read in the economy,” Atkin said.
Anecdotal evidence shows new business lending has slowed, he said. If it wasn’t for the immediate expensing of assets coming to an end in June, Atkin said that he would expect the current volume of credit applications to be a lot less.
“I will be interested to see what happens in July when this program finishes if it is not replaced,” Atkin said. “At CAFBA, we are advocating for the Instant Asset Write Off to be reinstated with a limit of $100, 000 to incentivise businesses to continue to invest.”
In response to trends around credit demand within certain industries, Atkin noted that large and small businesses involved in infrastructure projects continued to do well.
SMEs with steady contracts in place that don’t have a concentration of debtors represent good opportunities for commercial brokers, he said.
“Commercial brokers need to stay close to their clients to understand the opportunities and risks,” Atkin said.
As they provide rate for risk solutions, non-bank lenders appear to be doing very well in the current economic environment, he said.
CreditorWatch chief economist Anneke Thompson said that the increase in trade receivables and monthly business activity could be partly explained by the still “very high workloads” that many industries were dealing with.
The construction industry in particular is still working through high volumes of work, and is invoicing at a very high rate, but due to rising material costs, faces ongoing challenges, she said.
Six regions with highest risk of default located in Western Sydney
The CreditorWatch BRI ranks over 300 regions by relative insolvency risk based on data from around 1.1 million ASIC-registered credit-active businesses.
Six of the 10 highest ranking regions for probability of default are located in Western Sydney, CreditorWatch data showed.
The credit agency said it expected Western Sydney to be hardest hit by insolvencies over the next 12 months, noting that relative debt levels were high and many small businesses in the region were sensitive to slight movements in demand.
Ten regions with highest risk of default
The ten regions viewed by CreditorWatch as most at risk of default over the next 12 months are below. (Note: percentage shown is default rate for next 12 months)
- Melton – Bacchus Marsh: 7.01%
- Fairfield (NSW): 7.06%
- Kogarah – Rockdale (NSW): 7.13%
- Southport (QLD): 7.31%
- Bankstown (NSW): 7.37%
- Surfers Paradise (QLD): 7.38%
- Auburn (NSW): 7.43%
- Ormeau – Oxenford (QLD): 7.45%
- Canterbury (NSW): 7.55%
- Merrylands – Guildford (NSW): 7.80%
Ten regions with least risk of default
The 10 regions viewed by CreditorWatch as having the least at risk of default over the next 12 months are below. (Note: percentage shown is default rate for next 12 months)
- Norwood - Payneham - St Peters (SA): 4.68%
- Yarra Ranges (VIC): 4.77%
- Cottesloe – Claremont (WA): 4.81%
- Adelaide City (SA): 4.86%
- Cairns – South (QLD): 4.94%
- Ku-ring-gai (NSW): 5.03%
- Kingston (VIC): 5.06%
- Pittwater (NSW): 5.10%
- Warringah (NSW): 5.12%
- Geelong (VIC): 5.12%
Across the main cities, the risk of default for Perth CBD is 5.36%, 6.13% for Melbourne city, 6.19% for Sydney inner city and 6.34% for inner Brisbane.
The industries representing the highest probability of default over the next 12 months are food and beverage services, transport, postal and warehousing and arts and recreation services, CreditorWatch said.
The industries showing the lowest probability of default over the next 12 months are healthcare and social assistance, agriculture, forestry and fishing, and wholesale trade.
CreditorWatch said it expected business to business payment defaults to “rise sharply” in the later part of the year. Demand is expected to reduce, particularly in sectors reliant on discretionary spending, posing some of the toughest trading conditions experienced for some time.
