More Australian businesses are expected to become insolvent due to pressures of higher interest rates, inflation, wages and labour shortages, and lower consumer demand, says CreditWatch.

Payment defaults from business-to-business transactions hit a record high in February, and according to the data and technology company, there is a strong correlation between payment defaults and business failures.

Businesses with one default have a 24 per cent chance of going insolvent in the next 12 months, and this rises to 42 per cent for two defaults against two businesses and 62 per cent for three defaults against three businesses, it says.

CreditorWatch CEO, Patrick Coghlan, says the rise in B2B payment defaults and falling invoice values is a very concerning combination.

“Trade payment defaults going up while invoice values decline is a real worry,” he says. “This indicates that cash reserves are being depleted and margins are being squeezed. An increasing number of businesses have less cash coming in, which means they are then finding it more difficult to pay their own suppliers and as such we are seeing a steep increase in payment defaults being registered on the CreditorWatch database. They are also cutting the size of their orders and running down inventories.

“This payment defaults data provides our members with critically important intelligence about the trading behaviour of other businesses, some of whom they could have extended credit to.”

The CreditorWatch Business Risk Index (BRI) showed that payment defaults from business-to-business transactions were up about 50 per cent in the past year to 122, as companies faced lower consumer demand.

CreditorWatch Chief Economist, Anneke Thompson notes that the BRI data has been pointing towards a rapidly slowing economy for some time now, and this has now been reflected in the December quarter Australian National Accounts.

“Gross Domestic Product (GDP) grew by a very slow 0.2 per cent over the December quarter, taking the annual growth rate to 1.5 per cent,” she says. “However, in per capita terms, GDP has been negative for three straight quarters, which means Australia is in a ‘per capita’ recession. The sustained fall in the average value of invoices over 2023 was a very good leading indicator of the overall slowing of the economy.”

CreditWatch Key Business Risk Index insights for February:

  • B2B trade payment defaults are now consistently above pre-COVID levels, recording a record high in February and a 47.9 per cent year-on-year increase.
  • The average value of invoices for Australian businesses had a small uptick in January but is still trending down and sits 16 per cent below the February 2023 level.
  • External administrations are now sitting consistently above pre-COVID levels (up 24.6 per cent year-on-year).
  • Credit enquiries had a seasonal jump in February but are still trending down as trade activity declines.
  • Court actions are returning to pre-COVID levels. For our latest observed month, December 2023, they are up 52.0 per cent against December 2022.
  • Businesses in the food and beverage services sector remain the most at risk of business failure (7.08 per cent) by a considerable margin. Public Administration and Safety is the next riskiest industry at 5.39%, followed by Accommodation (5.09%).
  • The regions with the lowest risk of business failure remain concentrated around regional Victoria, inner-Adelaide and North Queensland. Ballarat, in regional Victoria, is the top-ranked region, followed by Norwood-Payneham-St Peters in South Australia and Townsville in Queensland.
  • The regions with the highest risk of business failure are around Western Sydney and South-East Queensland, with Merrylands-Guildford (NSW) the top-ranked region, followed by Bringelly-Green Valley and Canterbury, all in Western Sydney.
  • On a quarterly basis, the best performing region is Nundah, in inner-Brisbane, which moved 22.0 points up the index, while Stonnington-East in inner-Melbourne recorded the biggest slide down the index – also 22.0 points.

Based on BRI data coming through and models projecting external administrations and business failures, CreditWatch anticipates that the next six months, at least, will be very challenging for Australian businesses.

All businesses will need to watch their cash flow very closely, even when the cash rate begins to decline, which at this stage looks to be sometime in Q3 2024, it says, adding that at least  three or four cuts to the cash rate will be needed before Australian consumers start to feel more comfortable making purchases of discretionary items, which is unlikely to be until early 2025.