By Zilla Efrat 

Australian businesses faced tough operating conditions in the first quarter of 2024 and can expect little relief this year unless interest rates fall. 

The NCI Trade Credit Risk Index rose 13 per cent in the first quarter with business insolvencies reaching a record high on the back of marked weakness in the economy. This was the highest point of this index since the June quarter 2020 which coincided with the initial stages of the COVID pandemic. 

According to the March 2024 CreditorWatch Business Risk Index (BRI), external administrations rose 22.1% year-on-year, reaching a record high in March as businesses battled cost pressures, skilled labour shortages and declining consumer demand. 

“Most businesses, particularly those that are consumer-facing and therefore exposed to the vagaries of discretionary spending, are currently being hit by a range of heavy impacts,” said CreditorWatch CEO Patrick Coghlan. 

“We don’t expect business conditions to improve markedly until consumer spending increases, and that is dependent on interest rate relief, which is not even on the horizon at this point given the high rates of inflation in the US.” 

CreditorWatch says the US inflation figures mean the likelihood of cash rate cuts in Australia in 2024 now looks remote.  

While this outlook can change, CreditorWatch warns that businesses should prepare for weak consumer demand for the rest of 2024 and continued high debt financing costs. 

It says businesses in the food and beverage services sector remain the most at risk of business failure (7.44%) by a considerable margin. Public administration and safety is the next riskiest industry at 5.66%, followed by arts and recreation services (5.42%). 

The mining sector is also struggling. It has seen an increase in business failures in recent months and has experienced the biggest increase in overdue payments over the past year by a considerable margin. It has also been hit by a 74% increase in the rate of external administrations over the past 12 months. 

The regions with the highest risk of business failure are around Western Sydney (five of the top six) and South-East Queensland, with Merrylands-Guildford (NSW) the top-ranked region, followed by Bringelly-Green Valley and Canterbury, all in Western Sydney. 

CreditorWatch chief economist Anneke Thompson says trading conditions are getting harder for most small and medium-sized entities (SMEs). 

“Of particular concern is the continued high level of trade payment defaults which, coupled with the Australian Taxation Office (ATO) now lodging defaults for tax debts outstanding of $100,000 or more at increasing rates, means that more and more businesses are unable to meet their supplier payments on time,” she says. 

“This has a ripple effect on B2B trade and we expect these trade payment defaults to continue to increase while interest rates remain elevated.” 

That said, there is cause to be reasonably optimistic about the medium-term outlook. Income tax cuts take effect on 1 July 2024 and the recent Federal budget announced subsidies on electricity bills for some renters. Lower inflation at a time when wages are recording moderate growth will boost real wages. 

What businesses are doing

So, what are businesses doing to survive these tough times? 

ScotPac’s latest SME Growth Index shows that almost two-thirds of Australia’s SMEs took advantage of the extended Instant Asset Write Off Scheme in the 12 months to 30 June, claiming an immediate tax deduction on assets valued at an average of $91,500. 

Fortunately for businesses, this scheme was extended for another 12 months until 30 June 2025 in the May Federal Budget. 

The research also shows that rapidly rising interest rates and core business costs prompted businesses to boost the rate at which they reviewed their primary lending relationships. 

In 2015, almost half (47%) of Australia’s small and medium enterprises had not reviewed their lending relationship for several years. Eight years on, that figure has now dropped to just 22%. 

In addition, the research found that regular lending health checks are becoming more entrenched as cashflow management and business planning tools. 

It also reveals that 80% of Australian businesses now have more than one finance provider as the trend towards multi-banking picks up speed in the high-interest rate environment. 

Around half said they went this way because they wanted more support from their lender’s relationship management team and sharper pricing. 

Two-thirds said the ease of attaining credit facilities was also a major factor, while more than half said they were persuaded by a lender’s level of proactivity. 

With both the minimum wages and award rates rising, more than two-thirds of SMEs planned to hire fewer staff. A similar proportion said they would reduce employee hours and/or headcount. 

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