Australian Risk Climate: SMEs Riskiest after Four Years in Business

Equifax recently urged Small and Medium Enterprises to keep a closer eye on finances as they approach their four-year milestone

Small and Medium Enterprises (SMEs) approaching their four-year anniversary^[1] are entering the highest-risk period for business failure and should take extra steps to protect their business from financial stress, according to newly released data from Equifax, the global information solutions company and the leading provider of credit information and analysis in Australia and New Zealand.

Download Infographic: SME-Report-Infographic_0

According to the data^[2], 55 per cent of Australian SMEs – businesses with fewer than 50 employees and an annual turnover of less than $10 million – were credit active in 2017, 24 per cent of which were categorised as being high commercial risk.

Justin Eley, Senior Product Manager, Commercial Risk at Equifax, said that many SMEs moved into a growth phase at the four-year mark, which could explain the spike in adverse credit events around this time.

“When a business increases its volume and type of credit enquiries, its risk of default or other adverse events rises in parallel. For SMEs, a spike in credit enquiries is an expected result of deciding to grow a business that has been established and proven its financial viability for a reasonable stretch of time – frequently after around four years. To read Eley’s full commentary click here.

SME tips for managing a business credit profile

Know where you stand – Trying to improve or maintain your business credit profile without knowing where it currently stands is like flying blind. Business credit reporting services like Swiftcheck (www.equifax.com.au/swiftcheck) allow SMEs to understand their situation and manage their credit accordingly.

Be prudent when applying for credit – Do your analysis of the best credit for your business situation before actually making the application. Applications all have an impact on a business credit score – not just the credit that has been taken up.

Think ahead – Managing cash flow is a key challenge for SMEs, so building a buffer in terms of time or available money wherever possible will help business owners be ready in periods of growth or if they run into difficulty. Knowing how your customers pay others can also give you insight into when you can expect to be paid, and have early visibility of payment stress that could impact your business.

Understand payment terms – Staying on top of payments is vital to maintaining a healthy credit profile, and paying on time can help improve the credit risk of an SME. This is particularly important when asking lenders to provide considerable amounts of credit, for example, during business set up or periods of growth.

Be aware of external factors – What a business owes the tax office might not seem relevant to its credit profile, but draft legislation has been put forward that will allow the ATO to report companies’ overdue tax debts to commercial bureaus, if the debt is more than $10,000 and has been overdue for more than 90 days. Having a broad awareness of factors such as regulatory changes can help avoid accidentally ruining a previously good credit profile.