Australia’s business failure rate is only set to rise over the next year, analytics firm CreditorWatch states, as persistently high interest rates and lower consumption squeeze enterprises struggling to maintain profitability.
In its August Business Risk Index, released Wednesday, CreditorWatch said the national business failure rate is slated to rise from its current level of 4.54% to 5.76% in August 2024.
A slowdown in consumption, the end result of interest rate hikes designed to battle surging inflation, will continue to hinder businesses, said CreditorWatch CEO Patrick Coghlan.
“Twelve rate rises in just over a year was always going to have a major effect on consumer sentiment and force people to tighten their belts, having a particularly big impact on those businesses exposed to discretionary spending,” Coghlan said in a statement.
“I’m very sorry to say that we’re far from the peak of business failures.”
Food and beverage service business remains the sector with the highest probability of failure in the next twelve months, given its exposure to discretionary spending.
Businesses in the sector face a 6.96% probability of failure in the next twelve months.
Food and beverage services businesses also retain the highest chance of payment default at 7%, which is only compounded by the shrinking average value of B2B invoices — which recorded a decline of 36% over the last year.
“As the average size of invoices falls, it stands to reason that cash flow is also reducing among a growing cohort of businesses, and this is resulting in more late payment of invoices,” said CreditorWatch chief economist Anneke Thompson.
“Unfortunately, this has a snowball effect, as businesses that are being paid late are also at risk of becoming late payers themselves. The past few months’ worth of data tells us that this is already happening.”
Businesses in the transport, postal, and warehousing category face the next-highest probability of failure in the next twelve months, at 4.48%.
The spike in courier services handling higher-than-usual delivery volumes through late 2021 and 2022 has ended, the report noted, as existing providers compete in a shallowing pool of work.
Although business insolvencies are surging, rising court actions are yet to reach pre-COVID levels.
The exception to that trend appears to be court actions initiated by the Australian Taxation Office.
Winding up court orders initiated by the tax office surged in April and May and are gradually edging towards pre-COVID norms, according to Alares’ latest credit insights report.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
