Now for the good news on the credit front

There are pleasing signs the economic recovery has already started, with credit inquiries and company registrations on the rise, writes CreditorWatch CEO Pat Coghlan.

This is in conjunction with other positive economic data such as the surprise drop in the jobless rate to 6.8 per cent in August, down from an almost 22-year high of 7.5 per cent in July.

Trade credit trending up

CreditorWatch’s proprietary data shows credit enquiries are back at pre-COVID levels, spiking to 56,989 inquiries in the last week of August. 

Our customers make a credit enquiry when they seek to offer terms of trade to potential customers to vet their financial strength to pay for goods.

There are two reasons why credit enquiries are rising. 

The first is because business owners have realised hibernating their enterprise and waiting to see how the economy is performing before undertaking new business won’t support their success through the pandemic and beyond. 

A more productive strategy is to get back to business as much as possible, which includes exploring relationships with new customers.

At the same time, businesses are using credit reports for clients and new prospects as part of their due diligence strategy given the heightened risks in the operating environment. 

This is a sensible approach and will help to ensure companies are doing businesses with other solvent companies, which will in turn help stabilise the economy. 

..the pandemic has awoken the entrepreneurial spirit in many of us. 

New companies on the rise

Another positive sign confidence in the economy is on the rise is the jump in new company registrations. 

There was a 5.62 per cent increase in new company registrations in August compared to the previous year, with 20,673 new companies founded. Between April and August this year 102,604 new companies were formed, which is broadly in line with 2019 numbers.

One of the reasons for this is because the pandemic has awoken the entrepreneurial spirit in many of us. 

With so many of us working from home, people are starting businesses in addition to their usual job or ‘side hustles’. 

Others may have been made redundant and have set themselves up as consultants in their field.   

Payment data improving 

When it comes to industry payment times, it’s pleasing to see manufacturing in the top five performing industries, given historically the sector has been among the slowest payers, with businesses taking 29 days on average to make payments. 

The reason manufacturers are in good shape is because supply chain disruptions as a result of the pandemic have prompted many businesses to source inputs locally, which is providing much needed support for a sector that had been experiencing structural decline for many years.

Some firms have also pivoted their operations to supply goods that have been in-demand as a result of the pandemic, such as personal protective equipment (PPE). This is also helping to create demand in the sector.

The agriculture, forestry and fishing industry has also become one of the fastest-paying sectors. 

Businesses in this sector are taking only 19 days to pay their bills, versus 32 days in March. 

This is also pleasing given the sector has been regularly beset by natural disasters such as drought, bushfires and floods over the past decade. 

The mining industry is the fastest-paying sector at the moment, with businesses taking just seven days on average to pay invoices. 

...although payment times in financial services are still high, they are improving.

Conditions are being supported by strong demand for Australian resources such as iron ore from China. 

Solid profit announcements from businesses such as Fortescue Metals, which reported a 38 per cent increase in underlying EBITDA to US$8.4 billion compared to the previous financial year at its 2020 full year results announcement, is evidence of the strength of mining. 

It is also good news that, although payment times in financial services are still high, they are improving, with average payment times now 53 days, down from a high of 75 days in June. 

A reason for this is because government initiatives such as early access to super are putting funds into small business owners’ hands and allowing them to meet their obligations. 
Banks’ results announcements have also been better than expected, with ME Bank recently posting a 24 per cent rise in underlying net profit after tax. 

Retail is another sector that is bouncing back, with average payment times coming down from 41 to 36 days between July and August. 

The sector is being supported by government incentives such as JobKeeper. The strength of this sector can be seen in the growth of businesses such as buy-now-pay later firm Afterpay, which experienced a 112 per cent lift in underlying sales at its recent full year results to $11.1 billion. 

The ongoing health of the economy will depend on how government stimulus is withdrawn, with a measured, staggered and means-tested approach vital to support the economy. 

It’s a similar story at electronics retailer JB Hi-Fi, which reported a 25 per cent lift in profit to $448 million in August. 

As this demonstrates, many businesses are performing better than expected. It is concerning, however, the number of businesses that have entered voluntary administration is 59 per cent lower than the 2019 average and down by 37.1 per cent between July and August. 

This is due to the temporary moratorium on insolvencies. 

So while the news is good, some of these results are synthetic and being supported by government measures. 

The ongoing health of the economy will depend on how government stimulus is withdrawn, with a measured, staggered and means-tested approach vital to support the economy. 

Expect more news on this when the federal government hands down the delayed budget on 6 October. 

This will deliver much-anticipated further insights into how the economy is tracking and the way out of the pandemic from here.