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Monday, April 4, 2011

Earthquakes could compound debt weight

Earthquakes could compound debt weight

Last updated 05:00 05/04/2011
Small businesses are suffering under the increasing weight of bad debt, which could be compounded further by Christchurch's earthquake, a survey shows.

Nearly half of business employing fewer than 20 people said they had bad debts of at least $1000, a survey by credit bureau Veda Advantage shows.

Of those about a quarter had written off debts worth between $1000 and $5000 last year, and another quarter were owed debts of more than $10,000.

Veda Advantage managing director John Roberts said he was concerned, but not surprised, that small firms were suffering under the debt weight.

"It's damaging for these businesses and over time could put them out of business."

The global financial crisis and Canterbury's earthquakes had left many business with adverse credit information on their credit files, making it more important to check a customer's ability to pay, Mr Robert said.

Grant Thornton partner Peter Sherwin said the survey served as further confirmation of the pressures business were under during recessionary times.

There had been an increase in the amount of bad debt being written off, but Mr Sherwin had not yet seen an example where it had directly caused the failure of a business.

"While we are talking about businesses of 20 or fewer people, some of those business can actually have quite substantial turnovers," Mr Sherwin said.

Business were often reluctant to hold continuing credit checks of a long-standing client, where there had been a good payment history.

"Credit checks do help, but it is no guarantee of the financial health of an organisation."

And financial circumstances could change quickly, especially during a recession.

Mr Sherwin advised businesses to perform credit checks on new customers, and keep a close eye on existing customers and their payments for any lag.

The Christchurch earthquake would create a significant flow on effect to businesses in other parts of the country that had supplied customers in the city immediately before the quake.

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