Business insolvencies rising fast – and the worst is yet to come

Business insolvencies are rising fast and insolvency practitioners warn there is far worse to come as credit is constrained and cashflow slows.

So far the downturn has been felt by many businesses selling to consumers. Now however the cashflow problems are hitting the business-to-business sector.

Insolvencies, which include bankruptcies, personal insolvencies and debt agreements, leapt to 9007 cases in the September quarter, up by 12.6% compared with the same period last year. Statistics from Insolvency and Trustee Services Australia show that 6693 people declared bankruptcy in the past three months, and almost 1000 of them were business bankruptcies.

Insolvency experts warn that the worst is yet to come. Curt Rendall, partner at chartered accountant Rendall Kelly, says the biggest problem is not the interest rate but that clients can’t get cash from the banks to do business. “That is really starting to bite, and that will bring the joint to its knees.”

Rendall says he has one client who makes pieces of machinery worth $200,000 and built to order. “He has been in business for 30 years and is waiting for final cheques to be drawn, but his customers can’t get leasing funds from their financiers and our client is up to their limit and his bank won’t lend even for a few days, so he’s got four machines sitting in his front yard because banks aren’t lending.”

He says that NSW is in the worst position. “We have actually been in recession for the last three or four years, but that has been disguised by successful businesses selling internationally or interstate. Now those businesses with clients outside NSW are being impacted. Now the other states are catching cold, NSW is getting pneumonia.”

He warns that he has barely any clients (between two people to 150 people) making profits now. “Everything stops unless the banks can be freed up to lend. Many businesses can’t pay their creditors and are struggling to pay their wages.”

Bryan Collis, Sydney insolvency partner at O’Brien Palmer, says he believes the affects of the sub-prime crisis and banking meltdown hasn’t really hit the economy yet. “Inquiries are up but we are not actually getting that many clients in the door,” he says. “We expected more but we think it hasn’t hit home yet. He thinks that businesses still think they can get credit in a crisis. “The issue now is it is very difficult to borrow money so for people who are looking to refinance, the low doc lending has shut.’

He believes the insolvencies will pick up pace when unemployment has a big spike.

Jim Downey, principal at Downey & Co, says that troubled companies began to pour through the doors about three to four weeks ago. “They are coming from all sectors. Retailers are particularly feeling the pinch. Restaurants, gyms, lifestyle type businesses are bleeding and as people put off spending,” he says.

Apparently gentlemen’s clubs and even some brothels are feeling the pinch. “A year ago if you were facing trouble some punter would buy your businesses and take it off your hands. Now the banks are not funding anything and there is no way out,” he says.

He says one industry in particular trouble is cars. “The banks are doing margin calls on cars. They are going in and saying you claim to have 1.2 million of cars on your floor, we reckon it’s $800,000 tops, so pay us $100,000. They then try and lend against their equity and the bank says guess what, your property has gone down.”

Another new issue is outstanding rents. Downey says that companies that were paying in 60 days are drifting out to 70 to 80 days. “As the dominoes fall, the problem is passed on,” he says.

Ian Rodgers from The Sheet warns that incidents of personal insolvencies and business bankruptcies is surprisingly high on a per capital basis this early in the downturn cycle. “It is already as high as it was at the end of the last recession,” he warns.