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Speaker 1: Welcome to the Fear and Greed Business Interview. I'm sure, Ailna.

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Speaker 1: The rate of business failures is now at its highest

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Speaker 1: level since January twenty twenty one, in the middle of

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Speaker 1: the pandemic. That's the headline of the August Business Risk

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Speaker 1: Index released today by creditor Watch. Business payment defaults are

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Speaker 1: also at record levels, with more businesses struggling to pay

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Speaker 1: suppli as. Patrick Coglin is the CEO of Credit to Watch. Patrick,

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Speaker 1: welcome back to Fear and Greed.

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Speaker 2: Great to be here, Thanks for having me, Sean.

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Speaker 1: So, the failure rate for Australian businesses currently averages four

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Speaker 1: point nine five percent. Where does that sit on the

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Speaker 1: spectrum and how much has it risen in recent months?

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Speaker 1: It's risen about seventeen percent since January. So we're seeing

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Speaker 1: this continued increase and we're expecting it to continue to

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Speaker 1: rise up to probably five point two percent, obviously depending

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Speaker 1: on a few key things. And I'm sure talk about Okay,

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Speaker 1: so why why is it happening?

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Speaker 2: Look, it's really tough out there. There's a lot of

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Speaker 2: I guess macroeconomic headwins, of course, with interest rates increasing,

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Speaker 2: inflation still stubbornly high, but then you've just got challenges

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Speaker 2: of Obviously, consumer spending is really tight. The labor market

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Speaker 2: we're still at almost full employment, so it's not easy

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Speaker 2: to get people, and when you do, you've got to

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Speaker 2: probably pay more than you were before. And then when

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Speaker 2: you start to look into individual industries, they've got their

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Speaker 2: own challenges as well. So there's not a lot of

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Speaker 2: positive news out there for businesses.

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Speaker 1: Okay, that consumer side, because when you read the report,

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Speaker 1: you certainly focus a fair bit on consumer spending. Whereabouts

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Speaker 1: is it being felt most? What are some of the

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Speaker 1: sectors that are finding and hardest.

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Speaker 2: So consumer discretionary spend industries in particular like hospitality, food

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Speaker 2: and beverage, arts and recreation are definitely feeling the pinch

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Speaker 2: the most, and they're basically getting hid by everything I've

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Speaker 2: just mentioned. But certainly at the forefront of the consumer

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Speaker 2: either spending less or we've seen a big trend of

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Speaker 2: this concept of trading down, which I like, that concept

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Speaker 2: of trading down. You know, instead of going for that

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Speaker 2: nice glass of wine and a bowl of pasta, you're

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Speaker 2: going to you know, the local takeaway joint instead.

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Speaker 1: Okay, something else that you talk about is the idea

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Speaker 1: that the tax office and the banks are also chasing

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Speaker 1: money owed. Now I don't necessarily think that's a bad thing,

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Speaker 1: but obviously that's the tax office particularly, that's that's hurting business.

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Speaker 2: Yeah, looks it's a tough one. I think that the

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Speaker 2: ATO is very easy to be a punching bag, and

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Speaker 2: I think that they actually are doing a very good

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Speaker 2: job and an important job in our economy because more

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Speaker 2: often than not, everyone is very connected. It's that what's

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Speaker 2: that Kevin Bacon saying the degrees of separate. You know,

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Speaker 2: if the ATO, if the ATO doesn't collect that debt,

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Speaker 2: then there's obviously less money for the government to obviously

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Speaker 2: invest in infrastructure, hospital schools, support the needy, et cetera.

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Speaker 2: But more importantly by allowing failing businesses. So those that

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Speaker 2: are tax debt and ultimately are going to fail, the

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Speaker 2: longer they last for the more chance they are going

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Speaker 2: to fail and bring other creditors down. And that puts

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Speaker 2: huge amount of pressure on the supply chain, both up

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Speaker 2: and down the supply chain.

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Speaker 1: Yeah, so I suppose that's the point we haven't discussed.

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Speaker 1: Are you seeing that that once you start to get

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Speaker 1: a few companies struggling, it becomes a bit of a

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Speaker 1: role on then it's actually hard to stop the momentum.

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Speaker 2: Yeah, that's exactly right. You know, if you if you're

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Speaker 2: trading with a with a company that's paying their bills,

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Speaker 2: you're probably more likely to increase your credit exposure to them,

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Speaker 2: increase the you know, the trade credit limit that you're

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Speaker 2: you're offering them, and then all of a sudden they

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Speaker 2: fall over, You're left out of pocket significant and then

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Speaker 2: you start to struggle to pay your bills. So it

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Speaker 2: really has a contagion effect when these organizations, businesses, companies

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Speaker 2: that are ultimately going to fail or allowed to survive

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Speaker 2: longer than they should. So the sooner that they can

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Speaker 2: as harsh as it sounds, so, the sooner they can

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Speaker 2: be put down, the better it is for the health

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Speaker 2: of the economy. And I think it's you know, it

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Speaker 2: is classic capitalism, right, you know, not everyone is going

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Speaker 2: to survive and thrive and the best ultimately rises to

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Speaker 2: the top and they're going to produce hopefully the best

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Speaker 2: product and service and employ more people, et cetera. But yeah,

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Speaker 2: the companies that are going to fail and need to

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Speaker 2: be allowed to fail.

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Speaker 1: Stay with me, Patrick, we'll be back in a minute.

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Speaker 1: My guest this morning is Patrick Coglan, CEO of Credit

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Speaker 1: to Watch. We had a period for a few years

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Speaker 1: there on the back of government spending where we didn't

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Speaker 1: get the company fail. Is that we expected?

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Speaker 2: Is this?

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Speaker 1: I mean, I'm kind of going on from what you're saying.

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Speaker 1: I'm not going to say putting them down, but i

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Speaker 1: am going to say, like, maybe we actually do. Maybe

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Speaker 1: it's not a bad thing for this to happen, to

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Speaker 1: have a cycle where this happens.

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Speaker 2: Yeah. Yeah, And let me let me just say, I'm

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Speaker 2: not trying to be insensitive there. It's okay, it's okay,

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Speaker 2: I'm conscious of it, but it is it is a

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Speaker 2: harsh reality that we have to live up to. Yeah,

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Speaker 2: So I think look through COVID period, there was obviously

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Speaker 2: a huge downturn in the number of companies that were failing,

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Speaker 2: and that was due to the fact that, you know,

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Speaker 2: the ATO, the banks team Australia was very supportive of

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Speaker 2: companies that couldn't pay their bills. There was a lot

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Speaker 2: of legislation introduced to support companies around you know, Safe

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Speaker 2: Harbor for example, and as a result of that, we

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Speaker 2: had thousands of businesses that would normally have gone into

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Speaker 2: administration didn't, so part of that is certainly still filtering

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Speaker 2: through the system, believe it or not. You know, we

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Speaker 2: are at least a couple of years depending on where

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Speaker 2: you measure the end of COVID where a couple of

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Speaker 2: years past that. But ACIK have mentioned that they're still

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Speaker 2: seeing companies being put into administration that have practically been dormant.

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Speaker 2: So that's a good thing. It's a cleanup and it

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Speaker 2: probably has a less of an impact on creditors because

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Speaker 2: they don't necessarily owe that much money. But then you're

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Speaker 2: also seeing the banks and ASK and the ATO getting

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Speaker 2: back into their normal collection rhythm. That was the expected

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Speaker 2: p pre COVID.

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Speaker 1: I mean, we mentioned the ATO, the banks are the

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Speaker 1: other ones. They were lenient on some companies doing that

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Speaker 1: COVID period. But I think it's fair for the banks

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Speaker 1: to actually be trying to recop the money they lent.

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Speaker 2: That's it. No one should begrudge any supply creditor lender

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Speaker 2: for trying to collect ultimately what they provided, whether they

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Speaker 2: provided good services or alone. They should be allowed to

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Speaker 2: collect that. And provided they're collecting that, you know, within

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Speaker 2: what legislation or industry norms that they fall into, then

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Speaker 2: that should obviously be allowed. So I think that the

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Speaker 2: banks are definitely taking a much more softer approach than

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Speaker 2: I would say, you know, years gone by, and certainly

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Speaker 2: you know pre Royal Commission. I think they're doing they

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Speaker 2: should be credited with doing a really good job of

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Speaker 2: supporting organizations. And when I speak to two banks, when

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Speaker 2: I speak to the ATO, when I speak to ASSEI,

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Speaker 2: the one thing that they all say and they make

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Speaker 2: really clear is don't bury your head in the sand.

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Speaker 2: Come and talk to us so we can find a

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Speaker 2: way through. It's those organizations that I mean that you

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Speaker 2: know left the business and it truly is just dormant

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Speaker 2: and needs to be wound up or a really naive

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Speaker 2: or maliciously you know, avoiding contact. They're the ones that

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Speaker 2: ultimately are failing.

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Speaker 1: Okay, So it hasn't been the most upbeat conversation no far,

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Speaker 1: Patrick with all these companies. But unfortunately it's not going

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Speaker 1: to get a lot better because there's also been credit

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Speaker 1: or watch your data shows that there's been an uptick

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Speaker 1: in businesses not being able to pay bills, which presumably

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Speaker 1: is the step before they fail.

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Speaker 2: It is it's a real leading indicator for us, So

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Speaker 2: just for those playing at home, we're a credit reporting agency,

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Speaker 2: so our customers are typically suppliers or creditors, and they

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Speaker 2: can register a default against customers that owe the money.

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Speaker 2: Right there's checks and balances and dispute processes in place.

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Speaker 2: What we're seeing is a significant increase and have done

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Speaker 2: since the end of COVID, and we've had probably two

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Speaker 2: or three record months in the last four and another

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Speaker 2: big jump just in August as well. So we are

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Speaker 2: certainly seeing an increase in defaults being lodged against companies

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Speaker 2: for not paying their bills or for paying significantly late.

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Speaker 1: So as a leading indicator, is there some way that

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Speaker 1: you can abstract that and work out what sort of

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Speaker 1: level we're going to get to.

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Speaker 2: Yeah, So our expectation is that the failure rate of

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Speaker 2: businesses overall, and obviously you can dive into different industries

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Speaker 2: as well, will continue to rise, and that's where we

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Speaker 2: see it going up to that sort of five plus

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Speaker 2: percent in the next twelve months. What we see a

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Speaker 2: significant increase in the failure rate or the probability of

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Speaker 2: failure of a company is where they've got multiple defaults.

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Speaker 2: So when multiple defaults have been registered by multiple creditors.

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Speaker 2: We're seeing significant increases sometimes up to sort of sixty

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Speaker 2: seventy percent increase chance of failure as a result of that.

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Speaker 2: So it truly is a leading indicator. So if you

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Speaker 2: run a report and you see a default or you

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Speaker 2: receive an alert, that's certainly cause for concern.

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Speaker 1: Okay, so what turns it round At the moment, the

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Speaker 1: momentum is go all going the wrong way? But what

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Speaker 1: do we need to stop the rot?

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Speaker 2: Yeah, and look, I'm always very conscious of finding green shoots,

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Speaker 2: and they are there. You have to look a little

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Speaker 2: bit closer than usual at the moment, unfortunately, but they're

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Speaker 2: certainly there. I think every day that goes by, every

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Speaker 2: week that goes by, we're closer to a rate cut

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Speaker 2: that that is that is sort of utopia, that first

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Speaker 2: rate cut. I think we'll get a bit of a

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Speaker 2: sugar hit when there is consensus amongst sort of you know,

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Speaker 2: bond traders and banking economists and the RBA that that

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Speaker 2: we're you know, we have a month that it's most

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Speaker 2: likely to happen, that that will provide confidence into the market.

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Speaker 2: But really nothing can, nothing can beat that first rate

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Speaker 2: cut that we're hopeful of seeing in the I don't know,

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Speaker 2: not too distant future, in near future, anyone's guess at

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Speaker 2: the moment. But the other, the other green shoot that

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Speaker 2: I want to talk about is the fact that Australian

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Speaker 2: businesses are really resilient and we saw that through COVID.

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Speaker 2: We really did see them invest in technology and automation

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Speaker 2: inefficiency and they were able to tread water, you know,

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Speaker 2: soundly supported often by their creditors, their customers, their banks,

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Speaker 2: et cetera. And I think we're in a similar position

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Speaker 2: at the moment. While there's an increase in failures, increasing administrations, insolvencies,

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Speaker 2: what they owe is by the looks of things, less

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Speaker 2: than what they own pre COVID, So there's less debt there,

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Speaker 2: which is good and that has less impact on obviously

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Speaker 2: the supply chain.

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Speaker 1: Always good to finish an interview on good news, Patrick,

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Speaker 1: thank you for talking to Fear and Greed.

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Speaker 2: Thanks for having me.

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Speaker 1: That's Patrick Coglan, CEO of Creditor Watch. This is the

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Speaker 1: Fear and Greed Daily Interview. Join us every morning for

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Speaker 1: the flour episode of Fear and Greed daily business news

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Speaker 1: for people who make their own decisions. I'm Sean Elmer,

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Speaker 1: enjoy your day,