Business activity slumps towards a record low as company failures increase

Business activity has plummeted on the back of interest rates rises that have hit consumer spending and sent companies to the wall, the CreditorWatch business risk index shows.

Australian business activity has plummeted to near record lows as interest rates rises hit consumer spending and sent more companies to the wall.

The CreditorWatch business risk index (BRI) shows the value of business-to-business invoices slipped 36 per cent year on year in August to its lowest since January 2017, reflecting an economy spluttering to keep its head above water.

CreditorWatch chief executive Patrick Coghlan said the impact of tighter monetary policy and inflation on consumers was clearly being felt by businesses.

“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,” Mr Coghlan said.

“It is having a particularly big impact on those businesses exposed to discretionary spending. I’m very sorry to say that we’re far from the peak of business failures.”

Company insolvencies are up 28 per cent year on year, which is their highest point since October 2015. Trade payment defaults, a leading indicator of future business failure, have risen 30 per cent.

As more businesses fall further behind in payments, and consumer and business activity also declines, CreditorWatch expects the rate of business failures to increase dramatically over the next year. It forecasts the national business failure rate for the next year to increase from the current rate of 4.54 per cent to 5.76 per cent.

For Lease signs on a retain premises on Bourke St in central Melbourne.

Businesses in the food and beverage services sector are the most at risk of payment defaults, while the transport, postal and warehousing are the next riskiest industries.

Insolvencies in the construction industry have been consistently trending upward since May 2021 and are now above pre-Covid levels.

The regions with the highest insolvency risk are cluster around Western Sydney and South-East Queensland.

CreditorWatch chief economist Anneke Thompson said that monetary policy tightening had worked to slow consumer and business spending.

“This, in turn, is driving inflation down,” Ms Thompson said. “The unfortunate reality is that this will also result in business failures, particularly for those businesses that were already only marginally profitable when interest rate settings were low.”

She said businesses continued to lodge defaults against their debtors at record rates.

“As the average size of invoices falls, it stands to reason that cashflow is also reducing among a growing cohort of businesses, and this is resulting in more late payment of invoices,” she said.

“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.”

The Australian Taxation Office has also been tougher calling in GST payments that are overdue, which has compounded the pressure on business cashflow.

Company directors were putting their houses on the line as increasingly tough debt collection by the taxman put many close to bankruptcy.

Company directors were putting their houses on the line to stave off bankruptcy.

Revive Financial director Jarvis Archer last week said the ATO’s tough debt collection campaigns, following Covid-19, through its director penalty notice campaigns had caught many directors off guard.

“On top of this, many business owners have turned to unsecured business lending to keep the ATO at bay, or fill the cashflow gap left by rising costs or declining sales,” Mr Archer said. “These loans are almost always supported by a director guarantee.”

He said the problem for directors liable for their company’s ATO and loan debts was that even if they dealt with their company debts through an insolvency process, they still carried liability for the debts personally.

“This puts their house on the line, and makes bankruptcy a potential option – which may cause the business to close,” Mr Archer said.