New data from Equifax reveals a significant deterioration in Australia’s small business sector, with insolvencies up 23% year-on-year and more than 12,000 business failures recorded in the current financial year.
The current trajectory suggests insolvency rates will double historical averages, marking one of the most challenging periods for small enterprises in recent decades.
Reserve Bank of Australia trend data demonstrates the disproportionate impact on smaller businesses. Companies with fewer than 20 employees represent more than three-quarters of all business insolvencies from 2021 to 2024. When including businesses with fewer than 100 employees, this figure rises to 90% of all insolvencies, according to RBA analysis. The concentration of failures among smaller enterprises reflects their limited financial reserves and reduced capacity to weather extended periods of economic stress compared to larger corporations.
Equifax’s analysis of credit demand patterns reveals concerning trends in the small and medium enterprise (SME) sector. From January to April 2025, overall SME credit demand decreased 7.3% compared to the same period in 2024. Trade credit demand showed an even sharper decline, falling 13.8% year-on-year through April 2025. This reduction in credit seeking suggests businesses are either unable to access financing or deliberately avoiding additional debt burdens due to uncertainty about future cash flows.
Payment behavior analysis
The deterioration in business-to-business payment patterns provides another indicator of financial stress. Equifax data shows average Days Beyond Terms (DBT) reached 5.7 days in April 2025, representing an increase from 4.5 days in March 2025 and up 16.4% from 4.89 days in April 2024. The retail sector experienced particularly acute payment delays, with DBT spiking to 5.06 days in April 2025, compared to 2.51 days in March and 2.19 days in April 2024.
This deterioration suggests retailers are struggling with cash flow management as consumer spending patterns shift. Beginning July 1, 2025, businesses face additional cost pressures from two sources: energy costs are set to increase by up to 9.7%, while the minimum wage will rise 3.5%. These increases compound existing inflationary pressures affecting rent, materials, and other operational expenses.
Moses Samaha, Executive General Manager at Equifax, explained the cumulative impact: “Small businesses are facing soft customer demand along with inflation and global supply chain disruptions, while higher energy and wage costs could well be a tipping point for small businesses on the brink.” Beyond economic factors, businesses are contending with increased regulatory requirements. Samaha noted that “many small businesses are also facing regulatory changes, including stricter compliance and reporting obligations, which have added pressure, particularly in construction and retail.” These compliance costs create additional administrative burdens for businesses already operating with limited resources and staff.
Consumer spending patterns
Consumer behavior data reveals a cautious approach to discretionary spending despite recent monetary policy changes. While credit card and Buy Now Pay Later demand increased 15.26% in the first four months of 2025, Australian Bureau of Statistics figures show household discretionary spending fell 0.2% month-on-month in April. This suggests consumers are using credit for essential purchases rather than discretionary spending, directly impacting businesses dependent on consumer confidence. The food and beverage sector demonstrates the connection between consumer caution and business failures. Samaha observed that “food and beverage businesses are doing it tough, contributing most to the insolvency appointment rate.” The sector’s reliance on discretionary consumer spending makes it particularly vulnerable to shifts in household behavior.
Data shows 9.4% of retailers in the food and beverage sector ceased operations in the past year, reflecting the sector’s exposure to changing consumer priorities. The current situation reflects the unwinding of pandemic-era support measures. Samaha explained: “Pandemic era assistance may have had a long tail effect propping up some businesses, but the impact of the end of these subsidies is becoming clear as underlying vulnerabilities are exposed.” This suggests some businesses that survived the initial pandemic period through government support are now facing delayed reckoning with fundamental viability issues.
Despite current challenges, there are potential indicators of improvement. Recent Reserve Bank interest rate cuts and moderating inflation may provide relief, though the timeline remains uncertain. “There’s an expectation that insolvencies will stabilise as interest rates ease and discretionary spending returns,” Samaha stated. “However, insolvencies will remain elevated compared to historic levels as the remaining businesses from the pandemic hangover are shaken out.” The effectiveness of monetary policy in supporting small business recovery depends largely on consumer response.
“The effectiveness of interest rate cuts in increasing small business revenue hinges on a sustained recovery in consumer spending. So far the data suggests that consumers are saving rather than spending, and this could delay any rebound in the small business sector,” according to Samaha. One encouraging sign emerged in April spending data: “household spending on hotels, cafes and restaurants rose 2.2% in April,” suggesting some segments may be beginning to recover.
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