Cash flow pressures keep insolvency risks high – what SMEs should know

Business insolvencies remain high

While business insolvencies have plateaued, they are still at historically elevated levels, boosting the need for small and medium-sized enterprises (SMEs) to be extra vigilant in their cash flow management.

CreditorWatch’s June Business Risk Index attributes the flattening out of insolvency rates in recent months to a combination of income tax cuts in mid-2024, cost-of-living support from governments, a stabilisation in the rate of new companies with tax defaults and more moderate rises in costs.

It says 14,716 businesses went insolvent in the 2025 financial year – a 33% increase on the previous financial year. Hospitality, construction and other services accounted for over half of all these collapses.

While interest rates have begun to ease and further cuts are expected, CreditorWatch, a commercial credit agency, says global economic headwinds, such as US tariffs, demographic shifts, climate change and persistent cost pressures are creating a challenging business environment.

These factors are even hurting typically stable sectors such as healthcare and education, which is unusual as both benefit from significant government support.

Also struggling are businesses in retail, transport, postal, warehousing, rental, hiring and real estate services.

However, the good news, according to CreditorWatch, is that registered B2B trade payment defaults fell 6.5% in June, the lowest level of reported defaults since July 2024 – possibly a signal that cash flow pressures are easing across many businesses.

CreditorWatch notes: “If the volume of registered trade payment defaults were to continue to decline, this would suggest that some improvement in insolvency numbers might be forthcoming.”

Uncertainty ahead for Australian SMEs

That said, CreditorWatch CEO Patrick Coghlan warns that the environment remains highly uncertain for many Australian SMEs.

He believes the next six months will be critical in determining whether insolvency rates will begin to fall or remain stubbornly high.

He warns that several significant challenges remain for businesses. One is that previous large cost increases have not reversed, even though the rate of inflation and cost increases going forward have slowed.

On the positive side, interest rates have begun to fall, which should benefit consumers and businesses. But significant uncertainty remains about the effects on economic growth globally and in Australia from US President Donald Trump’s tariff and trade policies.

While Australia is not directly affected as much as many other countries, given the US is a small export market for us, CreditorWatch says indirect linkages are present via the large Asian economies, which are our largest export markets.

The US economy is also likely to experience slower growth because of the higher tariffs, which is never helpful for global growth, given that the US is such a large part of the world’s economy.

CreditorWatch points out that other longer-term influences, including artificial intelligence and technology, the ageing of populations, rising inequality, climate change and geopolitics add to the challenging outlook for businesses, although it says each trend also provides opportunities for business growth.

Cash flow is king (or queen)

According to Small Business Australia (SBA), recent research reveals that nearly 80% of Australian SMEs have experienced significant cash flow challenges over the past year, making effective cash flow management not just important, but essential for survival.

It says: “Cash flow truly is the lifeblood of any business. Even highly profitable companies can fail if they cannot manage their cash flow effectively. When you lack sufficient funds to pay suppliers, staff or creditors, banks may foreclose and suppliers may terminate contracts, potentially bringing your business to an abrupt halt.”

SBA says the most common factors hurting cash flow include declining revenues, low cash reserves and seasonal fluctuations.

These challenges have forced many small business owners into desperate measures. More than a quarter have dipped into personal savings or not paid themselves a salary in the past year.

“While these strategies might provide temporary relief, they represent unsustainable approaches that can jeopardise both business and personal financial security,” says SBA.

Strategies to strengthen cash flow

SBA notes that effective cash flow management begins with comprehensive planning and forecasting to ensure that funds are available for daily operations, payroll and unexpected expenses.

Regular monitoring of cash flow is also essential. This involves tracking all money flowing in and out of your business, understanding payment cycles and ensuring invoices are issued and followed up on promptly.

Good cash flow management is especially important at this time of year when SMEs often stock up ahead of Black Friday and Cyber Monday sales and the Christmas season.

SBA notes that key strategies to boost cash flow include managing your inventory and accounts receivables effectively and negotiating favourable payment terms with suppliers.

It notes that increasing cash inflow is often more effective than simply cutting costs. To bring in cash, you could consider reviewing your pricing, embarking on targeted marketing campaigns and exploring additional revenue streams to reduce dependence on primary income sources.

Funding solutions to bridge the cash flow gap

Some of the tailored funding solutions available in the market can also help. For example, invoice finance provides a business with fast access to funds based on expected future cash flows. It allows you access up to 95% of the value of your outstanding invoice upfront as a cash advance. Instead of waiting for 30+ days for your customers to pay, you can receive the money owed to your business today.

In addition, a line of credit gives businesses flexible access to funds that can be drawn down when needed and repaid as cash flow allows, making it a useful tool for managing seasonal fluctuations or unexpected expenses.

Additionally, asset finance helps fund the plant, equipment and vehicles your business needs to grow while trade finance helps you close the cash flow gap between sales and the purchase of materials or stock you need, both domestically and internationally.

To find out more about  ScotPac’s funding solutions for cash flow management, get in touch with our lending specialists today.