‘There is trepidation’: Why business owners like Jared are worried about their future

The number of failing businesses is surging, with the construction, hospitality and retail sectors bearing the brunt of high interest rates, escalating energy costs and falling consumer spending.

Fledgling airline Bonza has become one of the latest businesses to fail after it entered voluntary administration, while administrators revealed the company behind Botswana Butchery restaurants owes creditors $4.5 million, including more than $500,000 to staff.

Jared Merlino closed his Surry Hills restaurant and wine room Bartolo in January.Credit: Dion Georgopoulos

Data from the Australian Securities and Investments Commission shows there were 1136 insolvencies in March – compared with 555 in January and 968 in February. There were 830 insolvencies in March 2023 and 464 in March 2022.

The construction sector recorded the most failing businesses, with 2255 insolvencies to date in the 2023-24 financial year. ASIC defines insolvency as the first time a business enters external administration.

Insolvencies also piled up in accommodation and food businesses (1245), retail (565), professional, scientific and technical services (478) and manufacturing (416).

There have been 3491 insolvencies in NSW to date in 2023-24 compared to 2451 in the previous financial year, while Victoria recorded 2105 insolvencies this financial year compared to 1633 in 2022-23.

Bonza became one of the latest businesses to fail after the airline entered voluntary administration.Credit: Louis Trerise

Surry Hills restaurant and wine room Bartolo closed in January. Liquidator Nicarson Natkunarajah, from Roger and Carson, said post-COVID trading conditions, rising costs and flattened spending were behind the outcome.

Owner Jared Merlino said he found Surry Hills increasingly challenging in regard to foot traffic and chose to “get out clean and pay all staff entitlements and suppliers in full before conditions worsened”.

Merlino said patronage at his other venues – Kittyhawk, Big Poppa’s and The Lobo – remained at similar levels to last year, but people were spending less.

However, he said the cost of energy and insurance was “through the roof”, while wages, food and alcohol continued to rise.

“I think there is trepidation with winter coming if these costs keep going up, and spending continues to fall,” he said. “It’s definitely not as easy as it once was and margins are getting smaller.”

However, Merlino said venues were increasingly offering happy hours and discount offers in a bid to attract customers.

“If we want people to come out two or three nights a week, we can’t expect them to spend $120 plus each night,” he said. “We need to fit in with the economic situation and offer people value where we can, if we can.”

A 2024 survey conducted by Business NSW found more than one-third of hospitality and retail businesses were considering closure due to the impact of the rising cost of living.

The Business Conditions survey found 82 per cent of hospitality businesses reported a decline in customer visits, with 49 per cent reducing staff or their hours.

The federal and NSW governments say they have provided billions of dollars in subsidies and services for small businesses.

A NSW Treasury spokesman said the Minns government had provided “cost-of-doing-business relief” including $1.3 billion in energy relief and $615 million for toll relief as well as creating the Charter for Small Business.

“These initiatives highlight the NSW government’s commitment to work with small businesses on the issues they are facing,” he said.

Business NSW chief executive Daniel Hunter said small businesses were under significant pressure due to spiralling insurance and energy costs.

“This is not to mention new industrial relations changes at a federal level and owners trying to find skilled labour when the housing crisis forces many people to abandon new job and business opportunities,” he said.

Hunter said business conditions would deteriorate if state and federal governments did not ease tax and regulatory burdens.

“Businesses in NSW pay considerably more for certain insurances, for example, than their Victorian counterparts, impacting on whether businesses can afford insurance,” he said.

University of Sydney accounting professor Clinton Free said the construction sector always ranked highly in insolvencies because the fixed contract business model did not allow businesses to pass on higher input costs “and partly because of some suspect business models”.

Consumers had also tightened the purse strings in the past year in response to cost-of-living concerns, “which has started to really bite on the accommodation, food and retail sectors”, he said.

Free said he expected business conditions fuelling rising insolvencies might worsen before any improvement.

“2024 will be a good time to be an insolvency and restructuring professional,” he said.

Andrew Spring, a partner at insolvency firm Jirsch Sutherland, said commercial rents hiked up by landlords to pay land tax were “the straw that broke the camel’s back” for many businesses struggling with higher operating costs, tax debt and superannuation requirements.

The tough times in construction were straining relationships between builders and subcontractors as debts piled up, he said.

“A move towards enforcing contractual rights, placing responsibility on one party, may be contributing to the continued rise in construction insolvencies,” he said.

But he also said the surge in insolvencies represented a “weeding out” of zombie businesses kept alive during the pandemic by government stimulus, decreased tax collection and moratoriums on debt collection activities.

Spring said the federal government could play a role in destigmatising the insolvency process.

“Insolvencies are a natural part of a healthy economic ecosystem,” he said. “Too few insolvencies may suggest that governments are not encouraging enough entrepreneurial behaviours or are favouring the debtor too heavily.”

CreditorWatch’s Risk Index shows the highest number of business failures are in western Sydney and south-east Queensland.

CreditorWatch chief executive Patrick Coghlan said the lowest risk of business failure were in regional Victoria, Adelaide and North Queensland, which typically had more established businesses with less debt and older residents less likely to be impacted by higher interest rates.

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