Thousands of ‘zombie businesses’ are being propped up by government payments according to new data from CreditorWatch. Many of which are predicted to fold once payments like JobKeeper cease.
CreditorWatch reports there has been a 20 per cent decrease in the number of small businesses entering into administration from May to June, and 50 per cent fewer than in June 2019. The data for June, which also shows a 17 per cent decrease in court actions and a 25per cent decrease in payment defaults. While this would traditionally be good news, Patrick Coghlan, CEO of Creditor Watch says the results are a red flag for policymakers and an indication of many zombie businesses.
“At first glance, a decrease in business administrations, court actions and defaults seems to indicate a rebounding economy, however when we take a deeper look, it’s clear that trouble is brewing and that businesses are struggling with significant cash flow issues,” Coghlan said.
CreditorWatch reports significant delays in payments is putting the squeeze on many businesses with those in the arts and retail particularly hard hit. Payments in June were overdue by an average of 49 days across all industries, 342% higher than the June 2019 figure.
The growth in delays was even greater across industries like Arts and Recreation (up 900%) and Retail (up 367%), suggesting that behind the scenes, SMEs are struggling to make ends meet.
“Government stimulus packages like JobKeeper, JobSeeker, mortgage holidays and the much-needed Safe Harbour changes have provided businesses with a buffer of protection. Until now, the priority has been to keep as many businesses as possible above water,” said Coghlan.
The finance expert expects once the coronavirus relief packages wind down we will be left with a very different landscape as these zombie businesses crumble without government assistance.
“Come September however, support packages will be lifted and we’ll find that a substantial number of ‘zombie businesses’ have been kept artificially afloat. Banks will not be prepared to prop unviable companies and nor should taxpayers, however, the government can ease the impending insolvency curve by lifting Safe Harbour measures gradually and forming an administration service to support the industry.
“As a result, we’re likely to see a significant jump in the number of businesses coming out of hibernation and entering into administration in the coming months.”
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