Financial stress among Australian businesses has intensified, with key indicators showing a significant rise in business closures and defaults, according to the latest Business Risk Index (BRI) from credit reporting agency CreditorWatch.
Many businesses in central business districts (CBDs) have reported declining revenue as remote work arrangements continue to affect foot traffic. Reduced discretionary spending among consumers due to cost-of-living pressures has further weakened demand.
The number of business-to-business (B2B) invoice payment defaults increased by 47% over the year to February, according to CreditorWatch. The trend highlights the impact of high operational costs and weaker consumer spending, which have made it more difficult for businesses to meet their financial commitments.
Trade payment defaults have historically been a key predictor of business insolvency. Data from CreditorWatch indicated that businesses that default on invoice payments face a higher probability of insolvency, with the risk increasing from 0.70% to 7.9% within 12 months.
Patrick Coghlan, CEO of CreditorWatch, noted that while businesses were already under financial strain, global trade policies could create additional challenges.
“The expected slowdown in economic growth from the widespread US tariff regime will, unfortunately but inevitably, result in higher insolvencies. After a tough couple of years managing higher inflation, interest rate increases, and lower demand, I certainly hope Australia businesses are spared the worst of it,” he said.
He advised businesses to take precautionary measures, including reassessing their credit policies, monitoring customer financial health, and conducting portfolio risk assessments.
Following a temporary drop in insolvencies in December and January, business failures increased in February, aligning with ongoing economic pressures.
CreditorWatch chief economist Ivan Colhoun said insolvencies are expected to remain elevated, aligning with the findings of Allianz Trade’s latest Global Insolvency Report.
“Given the economic and cost pressures and continuing high levels of accumulated ATO tax debt, it’s too early to expect the level of insolvencies to reduce much in the period immediately ahead,” he said.
Focusing on Australia, data from the Business Risk Index revealed variations in insolvency rates across different states and territories:
The Reserve Bank of Australia (RBA) implemented an interest rate reduction in February, and mid-2024 income tax cuts are expected to provide some economic relief. However, business cost pressures and accumulated tax liabilities remain concerns.
The potential impact of US trade tariffs presents another challenge. While Australia has limited direct exposure to US exports, indirect effects – such as fluctuations in global markets, shifts in investor sentiment, and potential reductions in global economic growth – could affect Australian business confidence.
According to CreditorWatch, uncertainty surrounding US trade policy decisions could result in volatility in global trade and financial markets. Businesses are advised to stay informed and prepare for potential changes.
