17 Jul 2008

Sharp rise in firms defaulting on payments

7:16 am on 17 July 2008

A sharp rise in businesses defaulting on payments could result in more small firms folding, credit company Veda Advantage says.

Veda, formerly known as Baycorp, says there has been a 24% increase in business payment defaults in the first six months of the year compared with the same period last year.

Spokesperson John Roberts says the biggest problem is for smaller businesses, which usually have only a limited pool of funds available to cover non-payment of debts.

Mr Roberts says that in the past many owners would have used their own money to keep the business afloat, but harsher economic times few people have the funds to do this, and banks are often unwilling to extend credit to troubled firms.

Veda also says mortgage applications fell 21% in the first six months of the year, a figure that reinforces the view that the housing market is in a slump.

Industry data released last week showed house sales fell to their lowest level in 16 years in June and prices declined about 2%.

The number of people applying for a mortgage increased between March and May, but Veda says applications fell 10% in June, and this leads it to believe that any significant recovery is unlikely in the next year to 18 months.

Conditions are likely to get worse before they get better, it says.

A rise in the cost of living has also hit credit applications. Hire purchase applications fell 9.5% and personal loans agreements slumped 16% in the half year to June as households held off buying expensive items such as cars and washing machines.

Yet credit card applications rose, which the company attributes to people wanting the greater flexibility offered by a credit card compared with a fixed loan.

Consumer defaults rose 7%, with sharp jumps in the number of people not paying their phone or internet bills.

Veda says it is a worrying sign that New Zealand is slipping into recession.