Payment defaults are the clearest early warning sign of business failure, according to CreditorWatch. Dynamic Business breaks down the metrics that predict insolvency 12 months out.
What’s happening: CreditorWatch’s January Business Risk Index reveals that businesses allowing invoices to remain overdue by more than 60 days face significantly elevated insolvency risk.
Why this matters: Payment behavior is one of the earliest and most reliable predictors of business failure. CreditorWatch data shows that businesses with one or more registered payment defaults face an 8 to 15 per cent chance of insolvency within 12 months.
Most business failures do not happen overnight. They begin months earlier, visible in patterns that many small business owners either miss or choose to ignore. One of the clearest warning signs, according to CreditorWatch, is how long it takes to get paid.
The credit reporting agency’s latest Business Risk Index shows that businesses allowing trade invoices to remain overdue by more than 60 days face significantly elevated insolvency risk. In food service, where 12.4 per cent of business-to-business invoices now fall into this category, the sector is experiencing a 10.4 per cent annual closure rate, the highest of any industry and double the national average.
The connection is not coincidental. Payment behavior, both paying others and being paid, is one of the earliest and most reliable predictors of financial distress. For small business owners, understanding the thresholds that matter and actively managing payment health can mean the difference between weathering a downturn and becoming a statistic.
The 60-day rule
CreditorWatch tracks payment behavior across more than 1.1 million credit-active businesses in Australia. The data consistently shows that once invoices remain unpaid for more than 60 days, the risk profile of a business changes significantly. It is not just about cash flow. It is about what that delay signals: stretched finances, prioritisation of other creditors, or an inability to collect from customers.
“When overdue invoices in food service are running at more than double the national average, that’s not cyclical noise, it’s sustained financial stress,” said Patrick Coghlan, CEO of CreditorWatch, in the January report.
The national average for invoices overdue by more than 60 days sits at 5.9 per cent. Sectors significantly above this threshold tend to show higher insolvency rates within 12 months. Food service, at 12.4 per cent, is more than double. By contrast, pubs and clubs, which have maintained a healthier 3.1 per cent delinquency rate, are experiencing lower closure rates of around 8 per cent, still elevated but notably more resilient.
Why payment defaults matter
CreditorWatch’s data shows that businesses with one or more registered payment defaults face an 8 to 15 per cent chance of insolvency within 12 months. A payment default occurs when a creditor reports non-payment of an invoice, typically after multiple reminders and a minimum threshold period. Once registered, it becomes part of a business’s credit file and signals distress to suppliers, lenders, and potential partners.
The risk escalates quickly. Businesses that begin defaulting on trade payments often face a cascade effect: suppliers tighten terms or demand payment upfront, cash flow worsens, and the business falls further behind on obligations including tax liabilities. As Dynamic Business has previously reported, cash flow challenges were already a leading cause of SME failure before the pandemic, and the current environment has only intensified the pressure.
Hospitality leads all sectors in Australian Taxation Office defaults, a clear indicator of businesses struggling to meet their obligations. CreditorWatch’s analysis shows that ATO tax debt of $100,000 or more significantly increases insolvency risk, and businesses in financial distress often prioritise paying suppliers over tax liabilities to keep operations running.
What healthy looks like
The inverse is also revealing. Businesses that maintain low delinquency rates, pay suppliers on time, and avoid accumulating tax arrears have significantly lower failure rates even in difficult economic conditions. Pubs and clubs offer a useful case study. Despite facing the same wage increases, rent pressures, and input inflation as cafes and restaurants, their 3.1 per cent invoice delinquency rate reflects healthier balance sheets and greater capacity to absorb cost shocks.
What separates them? Asset backing, diversified revenue streams, and higher profit margins on core products like alcohol. These factors create financial buffers that allow businesses to continue paying creditors on time even when revenue softens. For SMEs without those structural advantages, maintaining payment discipline becomes even more critical.
CreditorWatch Chief Economist Ivan Colhoun noted in the January report that while unemployment remains low, households are still under significant financial strain. “Business conditions are likely to remain challenging, and insolvencies are expected to stay elevated or rise slightly over the year ahead,” he said. In that environment, businesses with poor payment behavior will be the first to fail.
How to monitor risk
For small business owners, the practical takeaway is straightforward: payment behavior matters, and it can be tracked. CreditorWatch recommends monitoring several key indicators:
- Days Sales Outstanding (DSO): How long it takes, on average, to collect payment from customers. A rising DSO is an early warning sign.
- Invoice aging: The percentage of invoices overdue by 30, 60, or 90+ days. Anything above the national average of 5.9 per cent for 60+ days should trigger action.
- Payment defaults: Any registered defaults on your business credit file significantly increase insolvency risk and should be resolved immediately.
- ATO debt: Accumulating tax liabilities above $100,000 is a strong predictor of failure.
Equally important is managing your own payment obligations. Businesses that delay paying suppliers to manage cash flow often trigger a cycle of tighter credit terms, reduced access to trade credit, and ultimately, financial distress. The businesses that survive downturns are typically those that prioritise maintaining strong supplier relationships and avoiding defaults even when revenue is under pressure.
CreditorWatch’s January data shows that trade payment defaults and new tax defaults both improved during the first half of 2025 before deteriorating later in the year. By January 2026, defaults were close to previous highs, suggesting insolvencies are likely to rise further in coming months.
The economic outlook remains mixed. CreditorWatch’s Economic Conditions Tracker signals a potential deterioration, reflected by softer profitability expectations and weaker consumer perceptions of household finances. While the labour market remains strong, households continue to report significant cost-of-living pressure, which is constraining discretionary spending and placing further strain on consumer-facing businesses.
The businesses that fail over the next 12 months will, in many cases, have shown signs of distress months earlier in their payment patterns. The businesses that survive will be those that recognised the warning signs and acted before the options ran out.
Keep up to date with our stories on LinkedIn, Twitter, Facebook and Instagram.
