On the positive side, Aussie businesses stand to benefit from recent and future measures to cut interest rates this year, alongside slower price increases and lower fuel prices amid uncertainties brought about by the spectre of the US’ tariff policies under the Trump administration.

Insolvencies have also plateaued in recent months, albeit at high levels, with the construction and food and beverage services sectors the most affected by these high levels.

Overall, the past year has seen the hospitality sector hit the hardest, not only leading in business closures but also ranking highest across three key indicators of financial distress: insolvency rates, arrears (late payments), and ATO tax debt defaults over $100,000. This has resulted in one in 10 hospitality businesses in Australia shutting down over the past 12 months.

CreditorWatch CEO Patrick Coghlan commented that hospitality businesses are particularly vulnerable in several key areas. “They are exposed to the vagaries of discretionary spending. So, when households feel the pinch from interest rate rises and price increases, they typically spend less at places like cafes, restaurants, bars and pubs. The increase in people working from home has also had an impact, mainly in outlets in CBD areas.”

He added, “On top of that, you have the business cost increases in areas such as wages, electricity, insurance and food and alcohol. You also have to remember that most hospitality outlets are small businesses, so they usually don’t have the cash buffers to get them through hard times that large businesses often do. I really feel for them – it’s tough right now. There are many businesses out there barely hanging on.”

CreditorWatch says it doesn’t expect a major turnaround for the sector until households feel the impacts of at least a couple of further rate cuts in their budgets.

Chief economist Ivan Colhoun commented: “We hear so much about the cost-of-living crisis, but it’s a ‘cost of doing business crisis’ as well, with businesses having seen significant increases in their cost bases. Businesses exposed to discretionary spending experience the worst of both worlds, with their costs pressured and their customers’ demand weakened. Hopefully, the recent interest rate cuts by the RBA can build on the beneficial effects of last year’s income tax cuts and cost-of-living support.”

Colhoun also noted the economy is at a particularly interesting crossroads. “Insolvencies remain elevated but have not deteriorated in recent months, the previous rising trend likely arrested by the income tax cuts of mid-2024 along with Federal and State government cost of living support measures,” he said. “It’s too early for the RBA’s February interest rate cut to be influencing these figures, though that cut and this week’s rate reduction will be welcomed by both businesses and consumers. And should have beneficial effects in the second half of the year.”

“Working against this more favourable setting is likely to be a combination of slower population growth, the effects of continued high costs and the uncertain impacts of President Trump’s tariffs and trade wars globally,” Colhoun added.

“Thankfully, there has been some unwinding of tariffs in recent weeks, though the net effect on global growth is still expected to be contractionary. Taken together, we expect an elevated level of insolvencies to remain over the next six months.”

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With economic indicators still weak for business, the RBA saw fit for a financial stability review into insolvency this month. 

Here’s what the review found in terms of what makes businesses go insolvent and what other firms can learn.

Why does insolvency occur?

Unsurprisingly, poor economic conditions drive higher insolvency rates. However, firms citing economic conditions as a cause of their insolvency also cite other issues, like poor strategic management or financial control. The RBA’s report concludes that economic conditions could exacerbate underlying issues with a business’ model or management. Moreover, insolvencies usually follow an extended period of cashflow difficulty where a business is unable to repay debts.

Which businesses are going under?

Hospitality and construction businesses: According to the report, construction and hospitality businesses are the most likely to go insolvent. Ventures in these sectors usually operate with slimmer profit margins and limited cash buffers, making them more vulnerable to poor economic conditions.

Businesses with unsecured debt: Most companies that enter insolvency have unsecured debt – i.e. sums owed to suppliers, contractors and non-bank lenders.

Small businesses: More than three-quarters of recent insolvencies have been small businesses with under 20 employees. Generally this is because they are more vulnerable to challenging conditions.

Which businesses are recovering?

Small businesses are more likely to resume trade after an insolvency appointment, due to their small outstanding liabilities.

The post What types of businesses are failing in 2025 – and what’s to blame? appeared first on Inside Small Business.

But brick-and-mortar hospitality businesses have it particularly bad right now, according to the latest Business Risk Index (BRI) from CreditorWatch. Last month saw hospitality insolvencies hit 9.3 per cent in the 12 months to February 2025 – a record high. Businesses in CBDs have been hit particularly hard, according to the BRI, as more people work from home and shop online.

According to CreditorWatch, food and beverage businesses are crumbling under the pressure of rising costs, including energy and insurance price hikes and higher rents.

ISB recently reported on the soaring cost of business insurance in NSW: 78 per cent of businesses there have seen double-digit increases in their insurance premiums over the past year.

Beyond the cost of insurance, rent, and utilities, wage and food-price increases have also caused hospitality insolvencies to skyrocket, the BRI revealed.

In fact, insolvencies rose across the board last month after dipping in December and January. CreditorWatch CEO Patrick Coghlan says that harsh new trade policies from the US are not helping matters.

“The expected slowdown in economic growth from the widespread US tariff regime will, unfortunately but inevitably, result in higher insolvencies,” he said. “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.”

Despite signs of economic recovery, CreditWatch’s Chief Economist Ivan Calhoun doesn’t expect insolvencies to slow down any time soon.

“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,” said Calhoun.

The post February 2025: Brick-and-mortar, hospitality insolvencies at record highs appeared first on Inside Small Business.

The finding comes off the back of a year of surging business insolvencies driven by two main factors: escalating cost pressures and more assertive collection activities by the Australian Tax Office (ATO).

Recent data from Insolvency Australia’s Corporate Insolvency Index reported that in the most recent financial year, 11,000 businesses went insolvent nationwide in 2024, a 39 per cent jump from the previous year. In addition, court-ordered liquidations doubled at a 99 per cent increase.

The ATO is also pursuing around $35 billion in unpaid SME debt and, to date, has issued almost 27,000 Director Penalty Notices in FY2024 for $4.4 billion in outstanding payments, an increase of 50 per cent.

The report also took note of the varying levels of business vulnerability in the event of losing a key business partner, with half of all SMEs sayihg they would suffer severe cashflow problems or face negative financial impacts lasting three months or more, while four per cent of SMEs declared they would need to shut down immediately. Only 21 per cent felt secure enough in their business diversity to weather such a loss without financial damage.

ScotPac CEO Jon Sutton emphasised that while the current economic indicators raise concerns, businesses that seek professional guidance when dealing with cost escalations and ATO debt will be best placed to recover.

“In the current high-cost environment, SMEs are understandably nervous about disruptions to their cash flow and supply chains, particularly those operating on thin margins,” Sutton said. “The good news is that unprecedented support and guidance is available to SMEs, starting with their brokers and key advisors.”

“SMEs that sit down regularly with their brokers and make a plan for unforeseen events like the loss of a key client or supplier will be well-prepared to survive cashflow fluctuations. Even for businesses placed into administration, the benefits of sourcing professional help are now clearly documented,” he added.

The report highlighted that small-business restructuring has emerged as a vital survival tool in recent years, enabling companies with liabilities under $1 million to maintain control of their business while collaborating with restructuring practitioners on creditor-approved turnaround plans.  According to ASIC data, of 573 companies that formally entered restructuring after January 2021 and completed their plans by July 2024, an impressive 89 per cent remain registered.

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The Index found that insolvencies, the business failure rate, B2B payment defaults and court actions are all on the rise as businesses battle a combination of cost increases, high interest rates, wage increases, skilled labour shortages, increased ATO enforcement activity and soft consumer demand.

In particular, insolvencies are at record highs in number and are up 57 per cent for the year to November while average business failure and closure rate for all sectors is currently at 5.1 per cent, the highest rate since August 2020. The failure rate is expected to be 5.6 per cent over the next 12 months.

B2B payment defaults, a leading indicator of potential insolvency, are also at record highs and have more than doubled in the past year.Court actions remain elevated as the ATO maintains its ramped-up debt recovery efforts.

CreditorWatch Chief Economist Ivan Colhoun shared that the 2025 outlook is likely to remain challenging until the RBA delivers some interest rate relief. This was previously not expected before May 2025, but the December RBA Board Meeting has opened the door to an easing in February provided the Board gains greater confidence in its inflation forecasts from the Q1 CPI at the end of January and other data releases.

An expected easing cycle over 2025 is expected to be helpful for households and businesses but is only expected to be moderate in size.

“Businesses and consumers will still need to adjust to the elevated cost of doing business and cost of living, as well as current interest rates, for some months,” Calhoun said,

CreditorWatch also found that late payments and arrears are trending higher and have risen relatively sharply in recent months, reflecting the cumulative effects of higher costs of doing business and cost of living and the lagged effect of monetary policy. Reflecting this, Average Days Past Due – the time businesses wait until their debtors pay invoices has lengthened over the past year.

Late payments and insolvencies have also both risen more sharply since the ATO stepped up its collections’ activity in October 2023. While some have noted that such rise is a result of the ‘catching up’ being done by the ATO, thus overstating the underlying situation, the data highlighted how the ATO’s actions affected the businesses in question and potentially other business relationships.

Alongside data that court actions remained elevated in recent months – though falling in November – the Business Risk Index also pointed out that collections activity will remain a source of pressure for businesses for some months to come on top of underlying challenging macro fundamentals.

Given the current situation, CreditorWatch CEO, Patrick Coghlan, commented that this Christmas will be another challenging one for Australian businesses, particularly those in consumer facing sectors.

“Our data, on multiple levels, shows businesses are under increasing stress,” Coghlan said. “Despite these headwinds, Australian businesses remain resilient.”

“We expect those exposed to discretionary spending such as Hospitality, Retail and Arts and Recreation will continue to find it particularly difficult, at least until consumers receive interest rate relief and increase spending again,” he further said.

“The incidence of bad debts is going to increase in line with this, which makes it critically important for business operators to monitor the payment behaviour of their customers and change payment terms where necessary,” Coghlan concluded.

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Tradies already have to contend with long hours of labour-intensive work in challenging environments from cramped spaces or exposure to extreme weather conditions, resulting in illness and injury. But the industry has faced significant challenges in recent years, exacerbated by the pandemic, inflation, and a cost-of-living situation that has driven many individuals and businesses over the edge.

Especially vulnerable to challenges are small construction businesses and sole traders, the latter of which constitutes 68 per cent of the construction sector.

Such businesses have to deal with fluctuating workloads, cashflow, and the responsibility of keeping a business afloat and employees, not to mention the nature of their work.

“Those that own their own business or are sole traders have the added stress of keeping admin at bay, cash flowing, and jobs coming in, so it’s just a pipe ready to burst without an outlet,” noted Dan Pollard, founder of trades job management platform Fergus.

No financial protection for small building businesses

Louise Stewart’s life imploded when her husband, Adam, went bankrupt.

Adam was a subcontractor for government projects, and not paid for work he did due to several builders’ businesses being placed in insolvency administration. As a result, the business went into liquidation and then ceased to exist.

“It was incredibly tough. Mentally, it broke him. It affected our marriage and had a significant impact on our children as well,” she shared.

Louise and Adam’s experience is far from unique – many tradies find their personal lives taking the hit when business challenges arise. Equifax found that sole traders in construction are 60 per cent more likely to be in early mortgage arrears versus the average consumer.

Stewart lamented that government support has been lacking in providing the assistance sole traders in the construction industry need it to in order to survive in these times.

She says, “The same problem persists – Australian governments have yet to implement measures to protect subcontractors’ payments from builder collapses. Nothing has changed.”

As such, government action would be needed to ensure the welfare of tradies in the construction industry, particularly when it comes to payments.

“We need to follow the system already in place in the USA and Canada, where it’s illegal for builders to misuse funds meant for subcontractors,” Stewart pointed out. “Funds should be protected from the insolvency administration process.”

In the meantime, Stewart developed the ProjectPay app, which automates payments directly to subcontractors, protecting them from the financial risks of builder insolvencies. After losing everything herself, she founded the tech company to prevent others from facing the same fate.

Physical and mental burdens

Pollard notes that small construction businesses are facing a recipe for mental exhaustion.

“The physical exhaustion and chronic pain associated with physically demanding work also affects mental well-being, and we need to be talking about it,” he says. “Time pressures add another layer of stress, as tradies often find themselves meeting tight deadlines and managing emergency callouts, which makes them feel like they are living in a constant state of urgency.

“Let’s face it, as tradies we aren’t always good at recognising or admitting that we need more emotional support,” he says. “But it’s time to change that.”

With eight construction companies going bust every day, it’s clear that the industry is in a precarious position. Without stronger support and protections in place, small construction businesses and sole traders will continue to bear the brunt of financial strain and mental exhaustion.

The post Construction crisis: why this SME sector has the most insolvencies appeared first on Inside Small Business.

Requests for help from distressed business owners who either fear that another business that owes them money has become insolvent or are worried about their ability to meet their financial commitments comprise the bulk of these requests and have been marked with a 50 per cent jump from the previous year.

Ombudsman Bruce Billson said disputes relating to getting paid were an early warning sign of a cashflow problem and can have a ripple effect that threatens the viability of other businesses. 

“Cashflow is the oxygen of enterprise, but difficult conditions mean when one party is late in paying, it can cascade through the supply chain,” Billson said. “Payment disputes are by far the greatest area of concern for small and family businesses and now account for 42 per cent of assistance cases, up from 36 per cent last year.“

Cash reserve challenges

Billson noted that, as a result, many small businesses are drawing on their cash reserves to keep their business afloat, even though one in four have no cash reserves and 18 per cent of those with cash reserves have less than a month’s cash at hand.

“For small- and family-business owners, their identities are interwoven into their business and the stakes are so much higher than just a job. Many have invested a lifetime – and put their life’s savings and family home on the line –- to build up their business. Nearly half of outstanding small business debts are secured by residential property,” Billson explained.

Struggles with digital platform providers

The Ombudsman added that small businesses have also sought help in dealing with big tech digital platform providers. and disputes involving a digital service accounted for over one in four new cases.

“The number of cases we’ve seen involving a small business having problems with a digital platform has more than doubled since July 2022,” he said. “Digital platforms have fundamentally changed the way small businesses connect and sell to their customers. Yet, when there is a problem – such as having your account shut down after being hacked – solving it can be a nightmare. In too many cases, when there is a problem, the digital platform providers require a time and resource-poor small business to navigate the most elaborate maze of dead-ends and blockages.”

Billson added, “We are calling for digital platform providers to implement clear, appropriate and standardised procedures for small business dispute resolution with clear escalation points and a real person to talk to.”

Other resolution requests

Meanwhile, 20 per cent of requests for assistance relate to contract disputes, while nine per cent involve a franchise disagreement, typically relating to contract renewals, breach of franchise agreement, or early termination. Some cases, such as those involving insurance, telecommunications, banking and finance, and workplace issues such as health and safety, are referred to other relevant dispute resolution agencies in line with ASBFEO’s legislation that says it is not to duplicate the functions of other government agencies. 

Small and family businesses with a dispute can find more information and guidance on the ASBFEO website –- asbfeo.gov.au – which also includes resources, checklists, tools, additional information about the Tax Concierge Service and the Quarterly Report.

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With about 83 per cent of 2022-23 reports lodged by insolvency practitioners relating to small businesses*, the sector stakes are incredibly high.

It was disappointing then for the recent Federal Budget to miss the opportunity for any tangible changes or reforms to the Australian taxation system.

Prior to the Budget, an RSM survey of mid-market businesses across Australia found 67 per cent had found the ‘cost of business’ either challenging or extremely difficult.

As such, it was hoped the Budget would address the long-term sustainability of Australia’s small business sector by addressing well over due tax reforms in areas such as employment taxes, intergenerational business transfers and GST. 

The Government has recognised SMEs as vital to Australia’s prosperity, contributing more than $500 billion annually and employing over 5.2 million people. However, tangible changes for SMEs are limited in this year’s Budget, with the bulk of spending focused on bolstering Government support and administration systems.

Direct benefits for SMEs really centre around a $325 electricity bill deduction and an extension to the Instant Asset Write Off (IAWO) provisions.

With RSM Pre-Budget business survey respondents suggesting energy had been the single biggest cost eating into business revenue this year, many will likely welcome the Budget-headlining measure of electricity bill refunds, with eligible SMEs receiving $325 in the 2024-25 financial year to be paid in quarterly instalments as a rebate against eligible electricity bills.

While the Instant Asset Write Off (IAWO) also featured, the rules allow for the immediate deduction for the cost of depreciating assets for SMEs. Usually the rules allow SMEs with turnover up to $10m to immediately write off assets costing up to $1000.

In a measure currently stalled in Parliament, for the year ending 30 June 2024, it is proposed that SMEs with turnover up to $50m will be eligible to write off assets costing up to $30,000.

This year’s Budget ignores the changes currently before the Senate and proposes that eligible SMEs with turnover up to $10m will be able to write off assets up to $20,000 for the 2024-25 financial year.

Key points are as follows:

• Temporary increase to the IAWO threshold to $20,000.
• Applies to SMEs with aggregated annual turnover of less than $10 million.
• Eligible assets must be first used, or installed ready for use, between 1 July 2024 and 30 June 2025.
• Applies on a per asset basis.
• Assets valued at $20,000 or more (which cannot be immediately deducted) may continue to be placed into the small business simplified depreciation pool and depreciated subject to the small business capital allowance rules.
• Provisions which prevent SMEs that have opted out of simplified depreciation measures from using the IAWO continue to be suspended to 30 June 2025.

While these measures should provide short-term relief to small businesses, unfortunately they are unlikely to address widespread economic strain, rising input costs, supply chain disruptions, labour shortages, weakening consumer demand and long-term issues like the ageing profile of business owners.

* Small businesses as defined by the Australian Bureau of Statistics are those that have fewer than 20 employees.

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This finding comes from the latest Alares Monthly Credit Risk Insights report which stated that SBRs accounted for more than 14 per cent of all insolvency appointments in April, while VAs accounted for almost 14 per cent. Furthermore, court liquidations were over 19 per cent as the ATO has remained active in pursuing direct court recoveries while the big four banks have remained “vigilant”, according to the report.

“Since the start of the (calendar) year we have experienced a noticeable uptick in Small Business Restructuring plans and Voluntary Administrations to resuscitate or restructure businesses across a wide range of industries,” Andrew Spring, Partner at Jirsch Sutherland, said. “Tax debt is the primary reason but higher operating costs are also pushing businesses to or over the edge.

“It’s obvious that out of necessity, an increasing number of businesses are discovering the benefits of Australia’s business rescue solutions,” Spring added. “We have some of the most advantageous legislation in the world: it’s both quick and commercially focused, but it shouldn’t be a last-minute or enforced decision.” 

And with insolvency figures still remaining well above pre-COVID levels, Jirsch Sutherland is urging business owners to overcome their fear and shame of being found to be insolvent and give their business the best chance of survival by availing SBR and VA measures.

“As the ATO continues to work through the record amount of outstanding tax debt, it’s increasingly driving small businesses into SBRs and larger businesses into Voluntary Administrations,” Patrick Schweizer, author of the Alares Monthly Credit Risk Insights report, said. “And our April report shows that insolvencies remained 50 per cent above pre-pandemic levels, reinforcing the long anticipated catch up in insolvencies from the pandemic lows. “Non-ATO initiated winding up applications were slightly down compared to March, which again points to the ATO currently being the key driver for insolvencies.”

Spring pointed out that the creditor community is becoming less tolerant to operational behaviours that may have contributed to a business’s financial distress, and that the ATO is again at the forefront of this changing creditor position.

“It’s placing an even higher level of scrutiny on historical compliance when considering a proposal for restructuring,” Spring warned. “Anecdotally, we’re hearing this is also the case with pre-insolvency discussions regarding ATO payment plans.

“As an involuntary creditor, the ATO doesn’t have the option to withdraw credit from a business – nor does it automatically know they’re even in a trading relationship until the liability is self-reported,” he added. “As such, a high importance on reporting compliance is required to allow an effective and efficient tax system. During the last few ‘pandemic years’ the ATO appeared to move away from this position, and for those that have become delinquent with their lodgement activity, the hammer is about to drop. If a business has fallen behind with their statutory compliance, it’s crucial to act now.”

Spring also shared that having a strong business rescue framework (such as the SBR and VA regimes) provides an opportunity for those businesses that have encountered some form of extraordinary distress – such as bad debts, weather events or pandemic influences – to not be forced to close, thus preserving greater value for creditors and stakeholders.

“A robust insolvency framework has many advantages, including recycling underperforming resources such as labour and equipment assets, into viable business ventures,” he said. “It also provides a balance between the debtor and creditor relationship, as well as giving confidence to markets that anti-competitive behaviours by unscrupulous players in the market will be investigated and held accountable.”

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According to their Quarterly Commercial Insights – March 2024 report, commercial credit demand increased by +0.7 per cent in Q1 2024 compared to the same quarter the previous year. This was driven by growth in business loan applications (+1.8 per cent) and a marginal increase in asset finance applications (+0.5 per cent), although trade credit applications declined by -3.8 per cent.

Insolvency rates at the total market level increased by +41.1 per cent in the March quarter 2024 vs the same period in 2023, and are up +145.7 per cent on the same quarter in 2022. Additionally, Days Beyond Terms (DBT), the average time taken to pay back dues, has increased year-on-year, bringing the average DBT to 6.5 days. The construction industry continues to outpace the market, paying their dues on average 10.2 days beyond terms.

“The total number of insolvencies in March surpassed the previous highest monthly insolvency volume, which was recorded in September 2015,” Scott Mason, General Manager Commercial and Property Services at Equifax, said. “The ongoing growth in insolvencies raises questions about the survivability of many businesses, particularly those like the SMEs and sole traders in construction and hospitality, that are facing financial stress in both their professional and personal lives.”

According to Equifax data, sole traders and small-business owners in the construction and hospitality sectors are significantly more likely to be in mortgage arrears than consumers with no commercial commitments, indicating growing financial strain.

“Across the board, many Australian consumers are struggling, with data from our consumer bureau showing that early-stage mortgage arrears are up 30 per cent in the last quarter compared to two years ago,” Mason said. “Given this overall increase in arrears, it’s of even greater concern that sole traders and SMEs in the construction and hospitality sectors are significantly more likely to be facing mortgage stress.”

Equifax also noted that sole traders in construction are 60 per cent more likely to be in early mortgage arrears versus the average consumer, and SMEs in this sector are 30 per cent more likely to be in arrears. Similarly, sole traders in the hospitality sector are 75 per cent more likely to be in early mortgage arrears than the average consumer.

“These business owners are having to make some extremely difficult choices around whether to prioritise paying their business or personal expenses and, as a result, their mortgage repayments are starting to lapse,” Mason said.

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