Invoice payment defaults surged 47% last year, indicating a lame increase.
Australia’s hospitality sector is facing an unprecedented wave of closures, with business closure rates rising to record yearly records through February 2025.
New CreditorWatch data shows that this is a sharp rise from 7.1% the previous year.
These closures result in voluntary and involuntary administrations, ASIC strike-offs, veterans in the solvent business, and voluntary closures.
The food and beverage services sector has been the hardest as businesses tackle cost pressures due to rising food prices, energy costs, wages and rent increases.
What exacerbates these financial burdens is a change in consumer behavior. Post-work behavior from home has significantly reduced pedestrians in the Central Business District (CBD), but increased discretionary spending has led to fewer customers leaving.
Default rise signals further closure
The hospitality sector is bearing the brunt of these challenges, but other industries such as retail, service-based businesses and manufacturing are also under tension.
Data reveals that invoice payment defaults have increased by 47% over the past year. This is an early warning sign of financial distress. Companies that fail to pay their invoices expect their bankruptcy risk to skyrocket from 0.7% to 7.9%.
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Creditor CEO Patrick Coglan warned that this surge in default is indicating more trouble ahead as wider economic factors, particularly US tariff policies, narrow the profitability of the business further.
“Unfortunately, we hope that the expected slowdown in economic growth from the US tariff system, which inevitably leads to higher bankruptcy, will help Australian businesses escape the worst after managing higher inflation, higher interest rates and lower demand for several years,” he said.
“We encourage businesses to take steps to manage their risks, such as reviewing credit policies, carrying out portfolio health checks, and more closely monitored customers.”
Which states are hit hardest?
After a brief penetration in December and January, bankruptcy rates rose again in February, continuing their upward trajectory.
Australia’s Capital Region (ACT) and New South Wales (NSW) recorded the highest bankruptcy rates above Victoria. Even in Canberra, considered an economically stable city, it shows a rapid rise in business failure.
In contrast, Western Australia remains the most resilient and supported by the strong mining sector that continues to support business stability.
Ivan Kolhoun, the creditor’s chief economist, pointed out that there was little relief.
“Given the economic and cost pressures and the continued cumulative level of accumulated ATO tax liabilities, it is too early to expect a significant reduction in the level of abolishment over the period soon,” Colhone said.
Political clash over support for small and medium-sized businesses
As economic pressures increase, both governments and opposition are offering competing visions to support small businesses, particularly in the hard-hit hospitality industry.
Opposition leader Peter Dutton is proposing targeted relief for small hospitality businesses with sales of up to $10 million.
His plan, which ruled out alcohol-related sales, would exempt businesses from Fringe Benefit Tax (FBT) over the early two years.
“This is a victory for small businesses that spend money on staff and clients, and a victory at hospitality venues where spending more on business. It helps businesses recover from a horrific period of less than three years of work,” Dutton said.
Sussan Ray, the deputy opposition leader, took a more keen tone and directly condemned the government of the sector’s struggle.
“Under the workforce, over 26,000 small businesses have gone to the wall. There are record high bankruptcies, of which over 4,000 were hospitality,” Ray said.
Treasurer Jim Chalmers dismissed these claims and questioned the feasibility of Dutton’s proposed “free lunch” plan.
“We support tough small businesses, and we do that in a more responsible way,” says Chalmers. He added that Australia’s current bankruptcy rate is below pre-pandemic levels, with business registrations continuing at record highs.
Can tax cuts and interest rate drops immerse the tide?
Despite the harsh outlook, there are some signs of relief on the horizon.
The recent income tax and the Australian Reserve Bank’s decision to lower interest rates in February could provide businesses with much-needed breathing chambers.
However, sustained cost pressures and global economic uncertainty, particularly trade-related disruption, continue to focus on small and medium-sized enterprises.
In the elections on the horizon, both key actors are rushing to present themselves as the best way to recover business. For businesses already on the brink of brink, the actual test is whether the proposed measures are sufficient to stem the flow of closures.
