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Business failures are rising and forcing many to rethink processes, according to the Experian Commercial Risk Barometer.
As of the last quarter of 2024, there was a 0.7 per cent increase in businesses operating in the Australian market.
Businesses at high risk of failure rose by 1.3 per cent, more than double the rate of establishment. Meanwhile, those at severe risk of failure rose 3.7 per cent, more than five times that rate.
What this points to, explained Experian, is industry stability and the added likelihood of a “moderate” rise in business insolvencies over the year ahead.
What is interesting is the industries that usually struggle are performing better than those who generally perform poorly amid economic challenges.
For example, information media and telecommunications, mining and construction industries fared best among the listed industries. Electricity, gas, water and waste services fared the worst, followed by education and training and financial and insurance services.
These trends point to a cocktail of economic challenges culminating in heightened insolvencies.
Shifting consumer behaviours are a major issue with people spending less due to their own cost-of-living challenges. Tougher trading conditions and issues with sourcing skilled workers were also seen as key challenges.
What a broker is experiencing
With the risk of business failure on the rise, the business lending space is surely experiencing challenges of its own.
Business owners are becoming far more conservative with loan decisions, said Flint Group CEO Christian Stevens.
“We’ve definitely seen a shift in the business/commercial lending space. Activity has slowed a bit, particularly when it comes to larger investments. There’s still demand for finance, but businesses are being much more selective about how and where they borrow.
“They’re looking for tailored solutions that give them the flexibility they need, especially given the uncertainty in the market. It also depends on the industry – some sectors are booming, while others are in a bit of a reset phase,” Stevens said.
Cash flow challenges and the cost of doing business were seen as the top challenges business owners were communicating to Stevens and his team.
Further, some lenders are passing on this strain to borrowers, which makes a tough team even harder as they’re being denied important loans. This is causing them to adjust priorities.
“With inflation still high and costs going up, businesses are feeling the pinch. Some are also struggling to access the right type of finance because some lenders are being more cautious. Even profitable businesses are having trouble maintaining their momentum in this environment,” he said.
“Business owners are all about staying stable and managing risk. They’re prioritising cash flow, ensuring they can meet their short-term obligations and looking for ways to protect themselves from any surprises down the track. A lot of businesses are tightening up their operations, focusing on retaining existing customers and making sure they’re in a strong position if things take a turn for the worse.”
As discussed in a recent Broker Daily article, a single rate cut isn’t going to fix underlying economic issues.
More is needed to turn insolvency rates down and bring some much-needed relief to the vital businesses that keep Australia moving.
“The rate cut is definitely a step in the right direction. It’ll help reduce borrowing costs for some businesses, which is good news. But honestly, it’s not going to be an instant solution,” Stevens said.
“The challenges businesses are facing go beyond just interest rates – things like inflation, labour costs and supply chain issues are still creating a lot of pressure. So, while the rate cut will help, businesses are still going to need to navigate some uncertainty in the months ahead.”
Related: More than a single rate cut needed to boost home ownership
