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Our vital food and beverage service industry is doing it tough amid high costs, with a record 9.3 per cent (or one in 11 businesses) closing in the year to February 2025.
This is a decent increase from the 7.4 per cent that shut up shop in the year to February 2024, as reported in CreditorWatch’s February Business Risk Index.
There are a variety of reasons contributing to this trend. Things like food price increases, energy and insurance price rises, wage increases, and higher rents have all played a part.
Not to mention the stubbornly high interest rates experienced over the past few years.
For comparison, the closure rates of the next few industries were significantly lower:
- Administrative and support services (6.2 per cent)
- Art and recreation services (6.2 per cent)
- Transport, postal, and warehousing (6 per cent)
- Retail trade (5.7 per cent)
- Construction (5.6 per cent)
The tariff trouble of US President Donald Trump is adding to the funding issues. As recently reported by Broker Daily, the Australian economy is likely to suffer in the wake of these taxes.
Simply put, NAB CEO Andrew Irvine said: “The problem with a very aggressive tariff posture is that it creates inflation.”
CreditorWatch CEO Patrick Coghlan said: “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 Australian businesses are spared the worst of it.
“We encourage businesses to take steps now to manage that risk, whether it is reviewing credit policies, running a portfolio health check or monitoring customers more closely.”
A reduction in investment is likely to cause the economy to fall, said Charles Darwin University Professor Rakesh Gupta.
“Tariffs can be seen as additional taxes on goods. For example, when we see higher taxes on beer, a glass of beer becomes more expensive at the bar. Similarly, tariffs on imported goods will mean these goods will become more expensive. In the longer term this may mean that domestic production will pick up and provide employment locally and domestic goods supply may increase. However, this reduces competition globally and in the short-term benefits government revenue,” said Gupta.
“A trade war, or any war for that matter, increases risk and uncertainty in the marketplace. An immediate impact is the decline in stock market we have seen in last two or three weeks. In the longer term, continuing trade war causes business and investor sentiment to decline, resulting in people investing less. This will cause overall economy to fall.”
Stress is hitting business owners hard, with a whopping 47 per cent increase in the year to February.
This figure was calculated based upon invoice payment defaults, with higher costs and softer demand placing strain on funds.
The risk of insolvency for Australian businesses rises from 0.7 per cent to 7.9 per cent when an invoice payment is defaulted.
Unfortunately, CreditorWatch said insolvencies are likely to continue trending upwards.
“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 CreditorWatch chief economist Ivan Colhoun.
The ACT was the worst impacted state for insolvencies, with a rate of 1.03 per cent over the year.
Following was NSW at 0.83 per cent, Victoria at 0.73 per cent, and Queensland at 0.71 per cent.
Broken down further, Western Sydney and South-East Queensland were the highest-risk regions. Businesses in Bringelly-Green Valley in Western Sydney have a forecast average business failure rate of 7.9 per cent over the next 12 months.
For brokers, this heightened insolvency means less work, as borrowers are becoming cautious amid the uncertainty.
Brokers are reporting less demand in the commercial and business lending space due to the added risk.
“There’s still demand for finance, but businesses are being much more selective about how and where they borrow,” said Flint Group CEO Christian Stevens.
“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.”
With the RBA set to meet next in May, there are hopes a rate cut could help mitigate some of these trends. However, with the strain of Trump’s tariffs, the central bank’s decision is anyone’s guess.
[Related: Businesses cautious in borrowing amid insolvency risk increases]
