Easy access to non-bank finance masks a hidden risk. Insolvency experts warn directors that alternative lending comes with tighter covenants and faster enforcement triggers than traditional bank debt.
What’s happening New data from Alares Credit Risk Insights reveals a divergence in lending enforcement across Australia. Non-bank lenders have reached record or near-record levels of court-based enforcement since 2019, particularly accelerating through 2023 and 2024.
Why this matters: Understanding this shift helps directors assess whether borrowing decisions will strengthen or jeopardise long-term viability, particularly when business conditions deteriorate.
Australian business lending is undergoing a structural shift that’s reshaping how companies access and manage debt. The change reflects tighter credit conditions across the banking system and a divergence in how traditional and alternative lenders approach risk.
Andrew Spring is a partner at Jirsch Sutherland, an insolvency solutions and business rescue firm. His analysis of new enforcement data reveals a significant pattern in how lending pressure is being applied across the economy.
For most of 2025, insolvency-related activity affected around 30,000 Australian businesses. In recent months, that figure climbed to more than 32,000. Within this environment, the role of different creditors in driving enforcement has shifted noticeably.
“From an insolvency perspective, enforcement pressure hasn’t fallen. It has shifted,” Spring says. “While the ATO remains the dominant source of court action, non-bank lenders are accounting for an increasing share of insolvency-related enforcement as the major banks step back.”
The data tells a clear story. Major banks increased court actions steadily between 2019 and 2024, then reduced enforcement activity in 2025. Non-bank lenders, by contrast, have continued to accelerate their court-based recoveries throughout this period, now reaching record or near-record levels.
This divergence reflects a deliberate change in lending strategy by major financial institutions.
Patrick Schweizer, Director of Alares, explains the mechanics. “After COVID, both the big four banks and non-bank lenders steadily increased their court recoveries. However, the big banks did a U-turn in 2025 and started decreasing their court activity, whereas non-bank lenders continued to increase at an even higher rate.”
The shift is not random. Schweizer identifies a structural cause: “I suspect the big four are now heavily focused on very low-risk lending, particularly residential mortgages and blue-chip corporates. This is pushing SMEs and borrowers with less-than-perfect credit histories towards second, third and fourth-tier lenders. There has also been a relative explosion in new private lending over the past couple of years.”
The consequence is significant. As banks retreat from SME lending, growing numbers of small and medium businesses have no choice but to access alternative finance.
The Hidden Cost of Easy Access
Non-bank lending appears attractive when traditional finance becomes unavailable. Terms are negotiated faster, documentation requirements are lighter, and approval happens quickly. This accessibility masks a fundamental reality: alternative finance carries structural costs that traditional bank debt does not.
Spring identifies the key differences. “Non-bank funding can play an important role in certain situations, but it often comes with higher costs, tighter covenants and faster enforcement triggers.”
Higher costs are obvious. Non-bank lenders charge interest rates that reflect higher risk and operational costs than major banks. Tighter covenants are less visible but more consequential. These are conditions attached to loans that restrict how a business operates. A covenant might require maintaining specific cash reserves, limit dividend payments, or restrict further borrowing.
Faster enforcement triggers are the most consequential difference. When a traditional bank loan breaches a covenant or payment terms are missed, the bank typically works through a remediation process, sometimes spanning months. Non-bank lenders, by contrast, often move to legal enforcement more quickly, especially in tighter credit environments.
The acceleration into court action reflects this approach. As non-bank lenders face rising credit risk themselves, they increasingly use court-based enforcement to recover funds before assets disappear or business conditions deteriorate further.
The Insolvency Backdrop
The shift toward non-bank lending is occurring against a backdrop of sustained insolvency pressure. After a brief dip in November 2025, insolvencies rose again in December, with year-on-year numbers exceeding 2024 levels.
The ATO remains the dominant source of court-based insolvency action across Australia, tracking well above historical levels. Direct ATO court action against companies and individuals continues to rise, even as personal bankruptcy sequestrations remain relatively subdued.
This combination creates a particularly challenging environment for businesses already facing cash flow stress. Multiple creditors are willing to use court-based enforcement simultaneously, compounding the pressure on struggling companies.
What Directors Need to Understand
The data reinforces a critical point for business leaders: the source and terms of financing directly influence how quickly a business can face legal action if conditions deteriorate.
Spring emphasises that easy access to non-bank lending does not remove directors’ responsibility to act prudently. “Easy access to non-bank lending and low-doc finance doesn’t remove a director’s responsibility to act prudently. Before taking on more debt, directors need to stop, look in the mirror and be confident the decision won’t compromise the business’s long-term viability.”
This requires understanding several realities. First, non-bank financing often masks the true cost of capital. Interest rates are higher, but covenant complexity can be equally expensive. Second, enforcement can escalate rapidly. A missed payment or covenant breach can trigger legal action within weeks rather than months.
Third, the timing of this shift matters. Businesses are turning to non-bank lenders precisely when credit conditions are tightest and when economic conditions are most fragile. This combination increases the probability that a business will struggle to meet stricter terms during a downturn.
Spring stresses the importance of forward-looking analysis. “Directors need to understand how quickly conditions can escalate if trading deteriorates, and why early advice is critical.”
This means stress-testing financial projections under adverse scenarios before borrowing. If a business cannot service debt comfortably if revenue declines 20 percent or costs rise unexpectedly, then non-bank financing at higher costs and with faster enforcement triggers becomes particularly risky.
The Broader Implication
The divergence in lending behaviour reflects a structural shift in how credit is distributed across the Australian economy. Major banks are concentrating lending on the lowest-risk borrowers: homeowners with substantial equity and large corporates with established cashflow. Everyone else is being pushed toward alternative lenders.
This creates a tiered lending system where access to cheaper capital becomes a competitive advantage for established businesses, while struggling or newer businesses are forced into more expensive, more restrictive financing arrangements.
For directors and business owners, the implication is clear: understanding the source and terms of financing matters as much as understanding the business itself. Easy access to capital is not always advantageous if the cost and enforcement conditions create fragility rather than strength.
The timing to seek advice is before signing the loan agreement, not after enforcement action begins.
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