Rising costs, reduced spending, and tougher lending push insolvencies to post-COVID high
Business confidence dropped in the second quarter of the year, leading to a contraction in the commercial credit market, according to Equifax’s latest data.
The credit information provider reported a 1.6% decline in commercial credit demand in Q2 2024 compared to the same period last year.
The Equifax Quarterly Commercial Insights report also revealed a significant 8.1% decrease in asset finance demand, the main contributor to the overall decline. Asset finance applications fell to their lowest level since the start of the COVID-19 pandemic, while business loan applications dropped slightly by 0.2%, and trade credit applications rose by 3%.
“Typically, we see an increase in asset finance applications in Q2 as businesses make major purchases before the end of the financial year,” said Scott Mason (pictured above), general manager of commercial and property services at Equifax. “This year, however, businesses are avoiding large credit contracts due to cash flow concerns and tighter margins.”
Insolvency rates increased by 34% in Q2 2024 compared to Q2 2023, driven by higher operating costs, reduced consumer spending, and a tougher lending market. The construction and hospitality sectors were the most affected, with insolvencies rising by 23% and 45%, respectively.
“These insolvency figures align with our credit demand data, which shows particularly low asset finance demand in Victoria and Queensland,” Mason said. “This is due to fewer enquiries from sectors like hospitality and construction.”
The construction industry faces tight competition, decreased demand, and higher operating costs in Victoria, while Queensland struggles with a tight labour market due to large infrastructure projects.
Despite the overall decline in credit demand, the quality of credit applications has improved, with business loan applications reaching a 10-quarter peak.
“The increasing credit quality of commercial borrowers indicates that businesses capable of enduring the current challenges will emerge stronger and better positioned for long-term success,” Mason said.
In Q2 2024, overall business credit applications fell by 1.6%. Western Australia (+4%) and South Australia (+6%) saw increased demand, while Tasmania experienced the largest decline (-11%).
Business loan applications increased by 0.2% year-over-year, with South Australia (+11%) and Western Australia (+6%) leading the gains. Meanwhile, trade credit applications rose by 3%, with the Northern Territory (+13%) seeing the highest increase. Asset finance demand fell by 8.1%, with the Northern Territory and Tasmania each experiencing an 18% drop.
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