Insolvency rates reach highest since 2015
The first quarter of 2024 saw a troubling spike in business insolvencies across Australia, reaching heights not seen since 2015. This surge in insolvencies occurs amidst a modest increase in commercial credit demand, according to the latest Equifax Quarterly Commercial Insights for March 2024.
Overall, business credit applications rose by just 0.7% compared to the first quarter of the previous year. This growth was largely driven by a 1.8% increase in business loan applications and a slight 0.5% uptick in asset finance applications. In contrast, trade credit applications decreased by 3.8%.
The spike in insolvency rates is alarming, with a 41.1% increase in the first quarter of 2024 over the same period in 2023, which represents a 145.7% rise from the quarter in 2022. Additionally, the Days Beyond Terms (DBT)—the average time businesses take to settle their dues—has increased to 6.5 days, with the construction industry notably slower, averaging 10.2 days beyond terms.
"The total number of insolvencies in March surpassed the previous highest monthly insolvency volume, which was recorded in September 2015. The ongoing growth in insolvencies raises questions about the survivability of many businesses - particularly those, like the SMEs and sole traders in construction and hospitality, that are facing financial stress in both their professional and personal lives,” Equifax general manager Scott Mason (pictured above) said.
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Further complicating the financial landscape are the mortgage arrears among small business owners and sole traders in critical sectors such as construction and hospitality. According to Equifax data, sole traders in the construction sector are 60% more likely to be in early mortgage arrears compared to the average consumer, with similar pressures evident in the hospitality sector, where sole traders are 75% more likely to face early mortgage arrears.
Mason said financial stress varies by region, explaining that in Western and South Australia, sole traders are twice as likely to experience early mortgage arrears compared to individuals without business commitments. In Victoria, he said the likelihood increases by 44%.
“These business owners are having to make some extremely difficult choices around whether to prioritise paying their business or personal expenses and, as a result, their mortgage repayments are starting to lapse,” Mason said.
On a state level, business credit demand varied significantly. Western Australia and South Australia saw the most substantial growths in demand, while the Australian Capital Territory experienced the most significant downturn.
This data reflects ongoing challenges in the Australian economy, with small businesses and sole traders bearing the brunt of these adverse conditions, potentially shaping the economic outlook for the coming months.
