After months of mounting pressure, Australian small and medium enterprises are finally catching a break.
New data from CreditorWatch reveals that business stress indicators are showing their strongest improvement in over a year, with payment defaults and insolvencies both retreating from crisis levels.
The May Business Risk Index shows payment defaults between businesses dropped 11.8% in a single month and are now down 18.3% from their December peak. Similarly, business insolvencies fell 0.9% from April to May and have declined 12% since hitting their worst point in November 2024.
The perfect storm is passing
For Australian SMEs, the data represents welcome relief after navigating what many describe as a perfect storm of challenges. Rising costs, constrained consumer spending, and elevated interest rates had pushed many businesses to breaking point throughout 2024.
“This levelling off of insolvencies has been long awaited and is very welcome, but we need to remember that several industries still face significant challenges, particularly those exposed to discretionary spending,” says CreditorWatch CEO Patrick Coghlan.
The improvement appears to be driven by a combination of factors working in businesses’ favour. The July 2024 tax cuts are putting more money in consumers’ pockets, while recent interest rate reductions are easing borrowing costs. Slower inflation is also providing breathing room, though Coghlan warns that previous price increases remain locked in.
“Post-COVID, we’ve seen inflation hit 30-year highs. Those rapid price increases across the economy don’t reverse when the inflation rate comes down again, the higher prices are locked in and remain as permanent pressures for businesses,” he explains.
Construction and hospitality leading recovery
The sectors that suffered most during the downturn are now showing the strongest signs of recovery. Construction and accommodation and food services, two industries that bore the brunt of economic pressures, are leading the improvement in insolvency trends.
This turnaround is particularly significant for SMEs, as these sectors employ large numbers of small businesses. Construction companies, many operating on thin margins, had been particularly vulnerable to the combination of higher material costs and reduced activity.
Manufacturing and wholesale trade have also stabilised, though some service sectors including healthcare, professional services, and retail continue to face headwinds.
Payment behaviour improving
Beyond insolvencies, the data reveals that businesses are also getting better at paying their bills on time. Business-to-business payment defaults have stabilised after months of deterioration, with particular improvements in construction, food and beverage services, and retail.
This trend is crucial for SME cash flow management. When businesses delay payments to suppliers, it creates a ripple effect throughout the supply chain, often hitting smaller companies hardest as they typically have less financial buffer to absorb delays.
Regional variations remain stark
While the national picture is improving, the data reveals significant regional disparities that SME owners should understand. Western Sydney remains the most challenging environment for businesses, with all six of the nation’s worst-performing regions located there.
Bringelly–Green Valley faces the highest forecast business closure rate at 7.89% over the next 12 months. High commercial rents, above-average personal insolvencies, and lower household incomes are creating a toxic combination for local businesses.
In contrast, inner-city Adelaide offers the most supportive business environment, with Norwood–Payneham–St Peters recording the lowest business risk in Australia at just 4.51%. Regional Victoria and North Queensland also show greater resilience compared to major urban centres.
Among capital city CBDs, Adelaide leads with the lowest forecast business failure rate (5.15%), followed by Perth (5.22%), Melbourne (5.81%), Brisbane (5.83%), and Sydney (6.24%).<h2
Despite the positive trends, SME owners shouldn’t expect smooth sailing ahead. The Fair Work Commission’s decision to increase the National Minimum Wage from July 2025 will benefit consumers, but add pressure on businesses, particularly in retail and hospitality sectors where labour costs represent a significant portion of expenses.
“The good thing is that we will likely see these funds recycled into the economy. Interest rate relief by the RBA, as inflation has moderated, should also improve cash flow a little for both consumers and businesses alike,” notes CreditorWatch Chief Economist Ivan Colhoun.
International factors also loom large. US trade and tariff policies are creating uncertainty that could impact Australian businesses, particularly those in export-oriented industries or dependent on imported materials.
Sectors to watch
While construction and hospitality are recovering, other sectors are emerging as new areas of concern. Electricity, gas, water and waste services show elevated levels of payment arrears, surprising given the essential nature of these services.
The waste services and solar installer sub-sectors are under particular pressure, reflecting the softer residential construction cycle and more cautious consumer attitudes toward discretionary spending.
What this means for SMEs
For small and medium enterprise owners, the data provides both encouragement and strategic guidance. The worst of the crisis appears to be passing, but businesses need to remain vigilant and adaptive.
Colhoun suggests that “we won’t see conditions improve sustainably for businesses in discretionary sectors until consumers see their wages grow ahead of costs for some time.” This means SMEs in consumer-facing industries should prepare for a gradual rather than rapid recovery.
The stabilisation in payment defaults is particularly important for SME cash flow management. Improved payment behaviour from customers should help ease working capital pressures that have constrained many small businesses.
CreditorWatch expects further interest rate reductions, potentially two to three more cuts, which should continue to benefit both businesses and consumers. However, slower population growth could dampen economic activity.
The Reserve Bank is likely to cut rates again at its July meeting, though the size of the reduction remains uncertain. Recent weak business survey data has some economists calling for a larger 0.5% cut to prevent economic momentum from stalling.
For SME owners, the message is cautiously optimistic. While significant challenges remain, particularly for businesses dependent on discretionary spending, the combination of tax relief, interest rate cuts, and stabilising payment behaviour is creating a more supportive environment.
The key for small and medium enterprises will be managing cash flow carefully during this transition period while positioning for growth as conditions continue to improve. Those businesses that can weather the remaining uncertainty are likely to emerge stronger as the economy stabilises.
Find out more at creditorwatch.com.au.
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