Interview: The businesses most at risk from payment defaults

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Sean Aylmer: Welcome to the Fear and Greed business interview. I’m Sean

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Sean Aylmer: Aylmer. During the pandemic, the level of government support meant

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Sean Aylmer: a lot of businesses that would normally have gone under,

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Sean Aylmer: stayed afloat. In some cases, well beyond their normal lifespan.

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Sean Aylmer: It meant we saw a much lower insolvency rate than

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Sean Aylmer: usual. Well, that trend is well and truly over. The

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Sean Aylmer: rate of business administrations has dramatically increased and is now

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Sean Aylmer: back to pre- Covid levels. Patrick Coghlan is the CEO

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Sean Aylmer: of CreditorWatch. Patrick, welcome to Fear and Greed or I

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Sean Aylmer: should say, welcome back to Fear and Greed. It was a

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Sean Aylmer: while ago, but you’ve been on the show before.

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Patrick Coghlan: Yeah, that’s right. Great to be back. Thanks for having me.

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Sean Aylmer: CreditorWatch release is the monthly business risk index. It’s out

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Sean Aylmer: today. Now take me through the current situation.

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Patrick Coghlan: Look, I always try to find the positives and the negatives.

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Patrick Coghlan: It’s quite easy, I think, over the last three years

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Patrick Coghlan: or so to be very, very negative. But there are

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Patrick Coghlan: a few little green shoots there. But look, overall it’s

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Patrick Coghlan: really tough out there for businesses, particularly small and medium

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Patrick Coghlan: businesses that are generally more cash strapped than the larger ones.

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Patrick Coghlan: And unfortunately, it’s probably only going to get worse and

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Patrick Coghlan: we’re going to be sort of stuck in this sort

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Patrick Coghlan: of scenario for a while. Yeah.

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Sean Aylmer: Okay. So what are the data points on that that

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Sean Aylmer: you are seeing?

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Patrick Coghlan: So the key data points that we see in our

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Patrick Coghlan: unique data that comes into our database from tens of

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Patrick Coghlan: thousands of businesses is the fact that trade payment defaults

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Patrick Coghlan: continue to trend upwards. So that is ultimately creditors or

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Patrick Coghlan: suppliers not being paid by their customers, by their debtors.

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Patrick Coghlan: We’re also seeing a significant reduction in ultimately revenue. So

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Patrick Coghlan: the value of the invoices that are actually being issued

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Patrick Coghlan: by businesses to other businesses. So really looking at a B2B

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Patrick Coghlan: sort of scenario in this report.

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Sean Aylmer: Okay. What about, can you break it down by industries

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Sean Aylmer: at all? What industries are facing the highest risk of

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Sean Aylmer: payment defaults?

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Patrick Coghlan: Yeah. So unfortunately there’s some key ones that are out

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Patrick Coghlan: in front often, and the one that’s by far and

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Patrick Coghlan: away in the most trouble at the moment is the

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Patrick Coghlan: hospitality industry. So bars, restaurants, et cetera, are really struggling.

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Patrick Coghlan: They’re obviously really exposed to discretionary spend. We’re also seeing

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Patrick Coghlan: a lot of pressure on the warehousing logistics space as

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Patrick Coghlan: well for a few reasons. Obviously there’s a big downturn

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Patrick Coghlan: in e-commerce, but they’re also struggling from an increase in

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Patrick Coghlan: commercial or lack of commercial, I should say, sort of

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Patrick Coghlan: warehousing areas that’s doing quite well from a cost perspective

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Patrick Coghlan: if you own warehouses, but also fuel for logistics companies,

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Patrick Coghlan: cost of fuel is obviously really high.

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Sean Aylmer: There’s some areas that aren’t doing as poorly as you

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Sean Aylmer: thought they might be. And I mean, I actually want

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Sean Aylmer: to ask about construction specifically. But otherwise, are there areas

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Sean Aylmer: which are holding up okay?

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Patrick Coghlan: Yeah. So I think let’s talk about the others before we

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Patrick Coghlan: get to construction, which is obviously always a good one

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Patrick Coghlan: to talk about. There’s definitely some positives that come out

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Patrick Coghlan: of it when we look at it from an industry perspective.

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Patrick Coghlan: Healthcare is performing really well. And then my two favourites

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Patrick Coghlan: to talk about, wholesale trade and manufacturing. This wasn’t that

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Patrick Coghlan: long ago that we were all talking about manufacturing being

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Patrick Coghlan: dead in Australia, and that’s certainly sort of roared back

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Patrick Coghlan: to life. I always like to note that agriculture, forestry,

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Patrick Coghlan: and fishing, so this is obviously an industry classification that

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Patrick Coghlan: comes through, is performing really well despite, if you think

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Patrick Coghlan: back to pre-COVID, it was fires, floods, and plagues that

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Patrick Coghlan: they were dealing with on a regular basis. So they’re

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Patrick Coghlan: performing nicely too.

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Sean Aylmer: Stay with me, Patrick, we’ll be back in a minute.

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Sean Aylmer: My guest this morning is Patrick Coghlan, CEO of CreditorWatch. Okay.

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Sean Aylmer: So what about construction?

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Patrick Coghlan: Yeah, look, construction’s a really interesting one. The first thing

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Patrick Coghlan: I’ll say is it’s probably the industry that gets… not

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Patrick Coghlan: probably, it’s definitely the industry that gets reported on by

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Patrick Coghlan: far the most from a media perspective, and that’s not

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Patrick Coghlan: a surprise. We live in a country where we are

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Patrick Coghlan: first and foremost property obsessed, and then construction as a

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Patrick Coghlan: whole produces a huge amount from a GDP perspective, is a massive employer of

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Patrick Coghlan: people as well. So fairly gets reported on, I would

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Patrick Coghlan: say the most, but probably slightly over indexed compared to

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Patrick Coghlan: some of the others. The other thing that is quite

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Patrick Coghlan: unique is that when a large construction company goes under

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Patrick Coghlan: and there’s always a few a year, you don’t have to think

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Patrick Coghlan: back too far to remember Probuild of course. We’re talking

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Patrick Coghlan: in the hundreds of millions for probably the big ones,

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Patrick Coghlan: and then sometimes even the billions for the really big

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Patrick Coghlan: ones.
So from a headline perspective, from an impact perspective,

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Patrick Coghlan: it is really, really significant. So what we’re seeing at the moment in construction

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Patrick Coghlan: is payments are always slow in construction, they remain slow.

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Patrick Coghlan: Anyone that operates in that industry knows that is that

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Patrick Coghlan: there’s a culture of just slow payment and there’s some

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Patrick Coghlan: unique nuanced elements around progress payments and holding funds for

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Patrick Coghlan: defects and whatnot. So what’s really important when assessing risk

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Patrick Coghlan: in construction is really understanding what your exposure is. If

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Patrick Coghlan: it’s a sizable amount, we’re talking hundreds of thousands if

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Patrick Coghlan: not millions, you need to be getting into the financial

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Patrick Coghlan: risk. You need to be understanding how does their balance

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Patrick Coghlan: sheet look? What’s their profit and loss for the last

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Patrick Coghlan: couple of years?
Can they actually fulfill the job or

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Patrick Coghlan: the order that you’ve engaged them with? So construction of

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Patrick Coghlan: all industries, I would say is one of the most

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Patrick Coghlan: complicated and it requires additional time to be spent when

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Patrick Coghlan: assessing it. But then you’ve also got the higher volume,

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Patrick Coghlan: low value types of relationships in terms of tradies ordering

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Patrick Coghlan: bricks and cement being delivered and whatnot. For those smaller

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Patrick Coghlan: projects, there’s probably less risk in that space. It’s those

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Patrick Coghlan: larger ones where a bit more due diligence needs to

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Patrick Coghlan: be performed.

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Sean Aylmer: Okay, Patrick. Let’s put all this together. The CreditorWatch data

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Sean Aylmer: is a great leading indicator of what’s happening in the

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Sean Aylmer: economy. How do you read it?

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Patrick Coghlan: Yeah. So look, there’s probably two ways to read it. One,

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Patrick Coghlan: it is really tough out there and it will continue

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Patrick Coghlan: to get tougher and there will be a sustained period

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Patrick Coghlan: of really tough trading. And I think there’s two horizons

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Patrick Coghlan: that businesses are looking forward to and that comes through

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Patrick Coghlan: in our data, but also from the hundreds if not

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Patrick Coghlan: thousands of businesses we’re talking to on a regular basis.

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Patrick Coghlan: In that one, when will we see somewhat of an

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Patrick Coghlan: official pause on rates? Now given historical sort of statements

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Patrick Coghlan: by the RBA, we may not get any sort of

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Patrick Coghlan: guarantee from anyone at the RBA around rates being on pause,

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Patrick Coghlan: but I think there’ll be a lot of confidence around, okay,

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Patrick Coghlan: we’re in a hold now and there’s unlikely to be more.

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Patrick Coghlan: So that’s horizon one. Horizon two will be confidence that

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Patrick Coghlan: we’re going to see a decrease or cut in rates.

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Patrick Coghlan: And I think fortunately where we’re at is businesses in

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Patrick Coghlan: Australia are really well positioned after sustained challenges through COVID.

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Patrick Coghlan: They’re operating efficiently where they had an opportunity to invest

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Patrick Coghlan: in technology they have and they’ve cut costs out of the

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Patrick Coghlan: business as well. So for those businesses that would’ve survived

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Patrick Coghlan: if COVID hadn’t have come along, so in a normal

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Patrick Coghlan: trading environment, they’re prepared for the future. But there’s always going to be those that

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Patrick Coghlan: go under. And I think what we’ll see is we’ll go above the

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Patrick Coghlan: number of insolvencies we usually see pre-COVID, and then that’s

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Patrick Coghlan: going to settle back down to a regular sort of rhythm.

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Sean Aylmer: Just where are we up to? I mean, we had

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Sean Aylmer: an artificially low rate of insolvencies during COVID because of the government handouts.

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Sean Aylmer: Have we caught up or I think what you just

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Sean Aylmer: said then we still have a bit of catch up

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Sean Aylmer: to go?

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Patrick Coghlan: Yeah. So yes, we have caught up and I often…

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Patrick Coghlan: I don’t joke, but I often say that external administrations

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Patrick Coghlan: is one of the most reported on stats over the

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Patrick Coghlan: last three years after COVID cases, vaccination rate, and now

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Patrick Coghlan: interest rates and inflation. Rather it’s often that number three

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Patrick Coghlan: on the list despite everything that’s going on. And you’re right,

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Patrick Coghlan: we saw a huge, huge downturn insolvencies for almost 18

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Patrick Coghlan: months where we were down 30, 40% from pre-COVID norms. We’re certainly back up there,

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Patrick Coghlan: both from a number of businesses, so volume of companies

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Patrick Coghlan: that are going into external administration, but also importantly the

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Patrick Coghlan: percentage of businesses that are entering external administration. There was

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Patrick Coghlan: a big boom in new companies being started over the

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Patrick Coghlan: last two or three years as people started side hustles

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Patrick Coghlan: or were working from home and decided, “You know what?

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Patrick Coghlan: I’m going to start a business and work from home

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Patrick Coghlan: rather than do a nine to five in the office.”

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Patrick Coghlan: So both those are showing that we’re above where we

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Patrick Coghlan: were pre-COVID probably give or take 5 to 10%, and we

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Patrick Coghlan: expect insolvencies to continue to climb probably up to 20%

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Patrick Coghlan: above those pre-COVID averages.

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Sean Aylmer: Okay. One final question. Everything you’ve just said, and we

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Sean Aylmer: talked about different sectors and the outlook for insolvencies and

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Sean Aylmer: things like that. Do you think Australian businesses in 2023 post-COVID,

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Sean Aylmer: post everything we’ve been through, are better at managing… or

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Sean Aylmer: managing risk, I suppose, are better at operating their business?

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Patrick Coghlan: Yeah. I would say yes. We were sort of fortunate

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Patrick Coghlan: as a country, as an economy to enjoy, I don’t know,

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Patrick Coghlan: what was it, a 10 plus year no recession economy.

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Patrick Coghlan: So not to say that business owners got lucky or lazy,

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Patrick Coghlan: but they really hadn’t had to experience a downturn. And I

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Patrick Coghlan: think COVID forced everyone to ensure that they, one, were prepared

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Patrick Coghlan: for that and could operate, and two, it’s ultimately set

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Patrick Coghlan: them up. So yeah, I think we are in a

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Patrick Coghlan: better position than we were pre-COVID and I think we’re

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Patrick Coghlan: more aware of how to deal with fast moving changes

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Patrick Coghlan: as they come at us.

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Sean Aylmer: Patrick, thank you for talking to Fear and Greed.

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Patrick Coghlan: Great to be back. Thanks guys.

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Sean Aylmer: That’s Patrick Coghlan, CEO of CreditorWatch. This is the Fear and

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Sean Aylmer: Greed Daily Interview. Join us every morning for the full

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Sean Aylmer: episode of Fear and Greed, Australia’s most popular business podcast.

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Sean Aylmer: I’m Sean Aylmer. Have a great day.