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F&B services remain most vulnerable to business failure: report


Australian businesses are facing a perfect storm, with external administrations hitting a record high in March 2024 according to the latest CreditorWatch Business Risk Index (BRI).

This surge reflects the ongoing challenges businesses face, including rising costs, skilled labor shortages, and weak consumer demand. The most vulnerable industries are food and beverage services, public administration and safety, and arts and recreation services.

B2B payment defaults are also on the rise, although slightly down from February’s record high, still showing a significant 22.6% increase year-on-year, signaling the mounting challenges in settling outstanding invoices. Moreover, court actions are on the upswing, gradually approaching pre-COVID levels.

The construction sector notably stands out in ATO tax debt defaults, accounting for a substantial portion of the more than 15,000 default records tracked by CreditorWatch. Among these, 23.8% are from the construction industry, with 70.4% of these records originating from construction services, primarily comprising smaller subcontractor businesses. Notably, residential builders within the building construction sector show a higher likelihood of defaulting on tax debts compared to non-residential construction companies.

Anneke Thompson, Chief Economist at CreditorWatch, underscores the challenges faced by smaller construction businesses, particularly those operating as sole traders or partnerships, in paying off large tax debts, which can severely strain their financial capabilities. “Of particular concern is the continued high level of trade payment defaults which, coupled with the 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.”

Patrick Coghlan, CEO of CreditorWatch, attributes the surge in external administrations to increased cost pressures on businesses and the financial burdens faced by consumers. He notes that substantial improvement in business conditions is contingent upon a rise in consumer spending, which, in turn, relies on factors like interest rate relief—a prospect currently distant due to elevated inflation rates in the US.

Key insights from the Business Risk Index for March include:

External administrations hitting a record high, up by 22.1% year-on-year.

The construction sector leading in ATO tax debt defaults exceeding $100,000, followed by professional, scientific, and technical services, and food and beverage services.

While there’s a seasonal uptick in the average value of invoices in March, the trend remains downward.

B2B payment defaults, though slightly decreased from February, continue to rise year-on-year.

Credit enquiries show a 4.3% increase from February to March but are down by 22.8% year-on-year.

Court actions are up by 45.5% year-on-year, gradually nearing pre-COVID levels.

Thompson emphasizes the ongoing difficulties for small and medium-sized businesses, particularly in construction, retail trade, food and beverage services, and mining, highlighting the persistently high level of trade payment defaults.

The mining sector, traditionally seen as stable, is experiencing heightened insolvencies due to various pressures, including labor shortages, adverse exchange rates, and market fluctuations. Although pivotal to the national economy, individual businesses within the mining sector face significant risks, particularly those reliant on specific mines.

With the likelihood of cash rate cuts in Australia diminishing due to high inflation in the US, businesses should brace for weak consumer demand and continued high debt financing costs throughout 2024.

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