On the pulse: more credit risk ahead

Looking ahead, credit risk is expected to peak later this year and return to normal levels by 2025. This forecast is informed by four key factors:

• Low national GDP growth for 2024 being 1.20%.
• Inflationary pressures remaining above the RBA’s target of 2-3%. 
• Persistent tight financing conditions from high cost of capital and tighter lending.
• Disposable incomes are set to rise in 2025 due to Stage 3 tax cuts.
  

In 2023, Hunter experienced our highest dishonour rate in five years. Increased dishonours and insolvencies indicate a declining economy. Considering this and other assumptions, we expect this trend to worsen in 2024. 

Since September 2021, dishonours have been rising, resulting in a 31.74% year-on-year increase in insolvencies in 2023. Insolvencies trumped pre-Covid levels in June 2022 and have since stabilised at around 2,500 failures per quarter. 

This high level of insolvencies will continue as businesses feel the pinch of tight cash flow in a bearish trading environment. Hunter's debt collection agency, AMPAC agree.

Soberingly, the national debtor day average has increased to 37 days. Businesses are turning to credit or going cashflow negative to help get them through.

In Xero’s 2023 Report “Money Matters: navigating the impact of economic conditions on the cash flow of Australian small and medium-sized businesses”, they found that:

• 27% of business owners have dipped into personal savings to maintain working capital.
• 34% have forgone a salary.
• 48% are anxious about their business's financial future. 

Ultimately, current trading conditions are playing havoc with forecasting and cashflow management. So, it’s no wonder more businesses seek products that provide cash flow certainty and business normalisation.

As the construction sector grapples with variable cost fluctuations on fixed-rate contracts, they remain at the lead for insolvencies.

A decline in customer disposable incomes is heavily impacting the accommodation, food and retail industries.

While these industries bear the brunt of economic pressures, many can find their way through with the proper support and strategies.

In uncertain trading conditions, premium funding shines as a quantified risk management product that supports the needs of brokers and customers alike. 

For clients facing operational hurdles and stricter lending criteria, premium funding is notably different from other working capital products thanks to the following benefits:

• Instantaneous approval in comparison to traditional lending instruments.
• No director exposure as premium funding requires no guarantees or collateral.
• Fixed but flexible loan facility that can change with your client’s business. 

For customers who already benefit from premium funding, brokers have a role to play. By proactively managing credit cycles, and with early intervention, we can work towards a positive customer outcome. 

As we expect an increase in demand from businesses looking to shore up cash flow and ease working capital pressure, brokers have an opportunity. Not only will premium funding help your customers navigate credit pressures, but it can also help brokers with speedier invoice payments, less administration and time spent on collections activity, as well as potential for improved customer retention. 

In light of the challenges, here’s three things brokers can do to support customers through the current environment:

1. Increase awareness of Hunter's financial hardship capabilities.
   Communication is key for payment flexibility.
2. Be proactive with trade-credit level clients through pre-approvals.
   Particularly for Construction, Food & Accommodation and Retail.
3. Prioritise knowledge of premium funding and best practices.
   Clear communication helps customers get the best from premium funding.