Equifax's Business Credit Demand Index: July to September 2011
Equifax's Business Credit Demand Index, released today, reveals business credit demand recorded its eighth consecutive monthly gain since February 2011, with the July-September quarter continuing an upward trend, up 2.3% on the same time last year. Although demand was 2.1% lower than the bullish June quarter, the general trend continues to be positive.
Moses Samaha, Head of Commercial Risk at Veda said: "Despite concerns over a global credit crunch, results show eight months of relative gains in demand for business credit. This is a positive result given the economic uncertainty in financial markets at the macro level both domestically and internationally. Our results also align with the latest Australian Bureau of Statistics figures, which show commercial finance commitments rose to a three year high in August this year, an indication credit confidence is gaining momentum."
Business finance enquiries (including asset finance, business loans and trade credit) have gathered pace since September 2010 and continue to perform strongly. Due to seasonality, the September quarter saw slightly weaker volumes than the robust June quarter 2011 (-1.7%), but year-on-year performance shows a 4.3% lift over first quarter performance last financial year.
Business loans in particular recorded strong growth, up 8.3% year-on-year, but dropping 4.9% on June 2011.
Trade credit recorded steady year-on-year growth of 2.7%, as well as strong gains on the previous quarter. Mr Samaha said, "as a finance category, trade credit historically shows strong first quarter demand; with quarter one of FY12 showing a rather strong uplift. Of the different credit classes, trade credit accounted for the largest proportion of business credit enquires, at 32%."
"Looking at longer-term trends, trade credit seems to have defied GFC impacts, compared to other credit types, highlighting the critical role credit plays in sustaining business operations," said Mr Samaha.
Asset finance recorded its third consecutive quarter of year-on-year gains, despite recording only soft growth in September 2011, at 1.7%. Quarter-on-quarter performance however, shows a drop of 8.4%. Mr Samaha said, "the September quarter drop is typical following a June quarter surge in the lead up to the end of financial year close, especially with regards to asset finance."
Across the industry sectors, mining was the only sector to record a dramatic increase in the percentage share of credit enquiries, from 0.84%in quarter one of FY11 to 1.60% in FY12. Share of enquiries also rose substantially for utilities (from 1.02% to 1.86%) and IT&T (from 1.13% to 2.06%). In a continuation of the FY11 trend, the greatest volume of commercial credit enquiries were made by the manufacturing, construction and retail sectors.
"As business owners either move from their initial set up period, or after a change in ownership of an established business, there appears to be a lift in credit demand. This is evident when you look at credit demand for companies of 1-4 years of ownership," said Mr Samaha.
Veda analysis of commercial credit enquiries and defaults in quarter one of FY12 shows SMEs appear to have been the hardest hit in recent months, as the proportion of credit defaults attributed to small businesses increased slightly, relative to other groups. At the same time, smaller sized businesses are also driving the greatest amount of activity in terms of volumes of credit enquiries.
Mr Samaha said "delays in customer payments has likely put added pressure on SME cash flow and timeliness of bills repayments, especially as these businesses tend to be more reliant on consumer credit as a source of business finance."
Mr Samaha said although most businesses are acting financially responsibly,it is vital that SMEs concentrate on maximising cash flow in the current climate and adjust their credit policies to safe-guard financial assets.
Business credit demand was relatively flat amongst the major states, except in WA, which recorded the largest year-on-year increase of 7.1%. This was followed by QLD, 2.4%, VIC, 1.8% and NSW, 1%.
In order to help manage their credit finance, Mr Samaha said businesses should ensure that they:
- Develop a clear credit policy that applies to all customers and clients.
- Research whether companies have a history of not paying their bills on time to minimise the risk of late payments and bad debts.
- Put out automated early warnings on customers who are experiencing difficult times.
- Reward and recognise customers and clients for paying their bills on time, such as incentives to pay bills as they fall due.
- Check your existing customers, as well as company directors and have regular credit reviews.
State Business Credit Demand Index Results, July-September 2011
- Overall business credit demand is up 2.3% year-on-year
- Demand in the September quarter is less buoyant than the June quarter, but this is in line with expected seasonal variation in business credit: WA recorded the largest year-on-year increase in credit demand, up 7.1%, followed by NT, 6.8% and SA, 4.2%
- QLD (2.4%), VIC, (1.8%), ACT, (1.8%), and NSW (1.0%), recorded flat year-on-year growth in credit demand
- TAS was the only state to record a year-on-year decrease, at -3.7%
- All states and territories, except ACT (3.4%) and TAS (1.3%), recorded quarter-on-quarter declines in credit demand in quarter one FY12: NT (-6.4%), SA (-4.3%), VIC (-3.8%), NSW (-1.8%), QLD (-0.9%), and WA (-0.4%).