‘Very concerning’: Small businesses are beginning to buckle under the strain of lockdowns, as defaults rise

‘Very concerning’: Small businesses are beginning to buckle under the strain of lockdowns, as defaults rise
Small businesses are beginning to buckle. (Brendon Thorne, Bloomberg via Getty Images
  • Lengthy lockdowns are beginning to crush small businesses, new data shows.
  • Defaults began rising in August for the first time since May 2020, while bank loan deferrals increased six-fold.
  • “This is a very concerning scenario for the Australian economy,” CreditorWatch CEO Patrick Coghlan said.
  • Visit Business Insider Australia’s homepage for more stories.

Australia managed to skirt the worst of the pandemic last year, but lengthy lockdowns are now beginning to crush small businesses.

Months-long lockdowns in New South Wales and Victoria led to business defaults rising in August, the first increase since May 2020, while external administrations would “inevitably rise” in the coming months according to CreditorWatch.

The latest temperature check by the credit reporting agency found the business community is beginning to feel the pressure, as receivables fell by 12.5% as trade came to a standstill for some businesses.

Forced to sit and wait out restrictions, new credit enquires fell almost 20% over the month, taking annual growth into the red for the first time in 12 months. Court cases climbed 35% during the same period.

“Despite state government support packages, it is obvious that continuing uncertainty about the path out of lockdowns has impacted business confidence,” CreditorWatch CEO Patrick Coghlan said.

“It is small businesses that will bear the brunt of this as they have the smallest cash reserves. Unfortunately, some businesses are in a position where they simply won’t be able to re-open at all. This is a very concerning scenario for the Australian economy.”

While defaults only crept up by 0.6%, economist Harley Dale said it was being suppressed.

Some businesses were simply ceasing to trade in hotspot LGAs, while others were working with creditors to wait out the current spate of restrictions. Throw in the extra slack provided by the ATO and the banks, which have offered to defer or restructure loans, and the worst is yet to be seen, according to Dale.

“We’re really in an artificial economy due to the lockdowns. It’s not a normal trading environment,” he said.

“For example, there is a dichotomy of activity between those businesses that are able to utilise technologies like click-and-collect and those that can’t. So, it’s important to view this … in that context.”

The full impact would become more apparent “later in the year” he added.

Business stress rising

Separate data from the banking sector shows just how tough some businesses are doing it.

Over the last month the number of business loan deferrals increased nearly six-fold, rising from 600 to 3,500, according to new data from the Australian Banking Association (ABA), with owners unable to make their repayments.

More than two thirds of those are now emerging from New South Wales, now in its third month of strict lockdown.

“Over the last month, we have seen a substantial rise in business owners putting their hand up for assistance, and I encourage anyone else who is feeling the strain to do the same,” ABA CEO Anna Bligh said.

“As lockdowns continue to be extended across cities and states, it is no surprise more strain is being put on people and businesses.”

With two in three business owners risking or willing to risk the family home to get extra funding, it places them in a particularly perilous situation should business restrictions stretch on.

More than 57,000 loans are now in hardship across the country, while home loan deferrals almost doubled over the same period to more than 27,000 nationwide. Almost 70% of those have been approved for New South Wales residents.

At the same time, inflation in the construction sector is threatening to set off a wave of business failures, while rising costs and lengthy shipping delays are placing further strain on businesses that continue to trade.

As RBA Governor Philip Lowe noted on Tuesday, many are simply trying their utmost to survive at the moment.

“For some businesses, there is a limit to how long they can wait.”