Some call the construction industry the riskiest business of all. And existing statistics back up this claim. According to the 2019 Q3 Small Business Risk Review, the quotient of court actions involving the construction business have escalated 40 percent since last quarter, while the quantity of payment defaults in the industry have seen an increase of more than 40 percent year-on-year.
While some industry practitioners see these numbers as typical, every construction business can undertake certain measures to safeguard their businesses from the risks of severe debt and insolvency.
The fact is that a director who garners a payment default on their company’s record is a full five times more likely to experience another default. In addition, a director who sees one business fail is twice as likely to experience a similar corporate failure and closure.
A troubled debtor is more liable to default on a smaller scale supplier than a more substantial creditor that they depend on for daily operations.
Smaller construction corporations bear the greatest burden of non-payment. They should school themselves about these issues from the very beginning. They need to exercise due diligence for creditors, debtors and suppliers equally, granting businesses a greater understanding of the likelihood of being compensated for their services from the inception of every construction contract.
Also remember that smaller construction businesses hold within their record of success a good indicator of industry success overall. Businesses do not enter the realm of debt protection quickly; their journey is rife with omens, with minor sub-contractors suffering the consequences of insolvency or lack of payment first.
These workers are the first influenced by cashflow problems, and the knock-on effect can span the entire industry.
While a simple credit check can identify businesses shortchanging smaller partners, a construction business also must maintain appropriate onboarding processes and review their creditors and suppliers on a frequent basis.
Small businesses in general are desperate for their pay. The typical number of days to payment for all industries is now 57. This number in the construction business extends beyond 90 days. Companies wish to extend their payment terms, and are simultaneously pressuring debtors to pay more quickly. Businesses at this point should review their due diligence processes, monitor their terms and cashflow, and buy needed technology and consultancy services.
A 90-day payment term can bear major consequences for small businesses and subcontractors. The answer is to keep current with invoices, requesting all monies owed in due time.
As the economy in general seems to continue its decline, it is vital that Australian SMEs do everything they can to prevent major payment problems.
In 2020, small business owners and operators must get informed in order to get paid.