Australians are being told to brace for a tidal wave of businesses going bust, and the job losses that may come with that, with a leading credit agency reporting a 20 per cent surge in small firms at risk of not paying their bills.

Fifty-eight-year-old April Brodie runs a beauty salon in a shopping complex in Melbourne.

She’s losing customers because they’re prioritising other types of spending.

“People are struggling and there’s definitely a difference in people’s spending habits,” she says.

“You know when people would come [every] four weeks, maybe they will come eight weeks now, or they’ll stretch things out to three months.

“People will often say to you, ‘I just can’t afford it, you know we’ve just got extra bills, I can’t afford it.’

“Whereas years ago, pre-pandemic, you would never hear people say that.”

She says suppliers to small businesses are now getting nervous about being paid, and as a result, they’re setting stricter rules.

“There’s a lot [who have] gone from 60-day accounts or 30-day accounts to where you have to pay up-front.

“As someone who’s been in the industry a long time, I’ve never experienced that before but now it’s a lot of pay up-front.”

20 per cent rise in small business at risk of failure

Data from illion shows suppliers are right to be nervous.

The credit risk firm monitors how well businesses are coping with their bills.

illion’s Commercial Risk Barometer tracks the risk of Australian businesses being unable to trade within the next 12 months with money owing and forced into closure – this includes businesses entering liquidation and/or being involuntarily deregistered.

In other words, it looks at how long businesses are taking to pay their invoices, to get an idea of how close they are to collapse.

The longer they take to pay, the more they’re struggling.

Its latest report shows hundreds of thousands of businesses are showing an elevated risk of failure.

For example, food services businesses are now paying invoices 18 days late on average, construction firms and retail businesses 14 days late, and the transport sector 12 days late.

“So many of those businesses where they are at the whim of consumers, discretionary spending, times are tough at the moment,” illion’s head of modelling Barrett Hasseldine said.

“Costs are high and consumers are really thinking twice about whether or not they do need to make discretionary spends.

“And so it’s those types of businesses which are really feeling the brunt of it.”

illion holds data on more than 2.5 million “active commercial entities” in Australia and says its data points to a spike in the number of businesses facing collapse.

“And just the sheer portion of businesses that were rated as ‘severe risk of failure’ in the coming year actually has jumped about 80 per cent in the past year,” warns Mr Hasseldine.

“I was surprised that had shot up so markedly.”

The smaller the business, the more at risk it is of failure.

For small businesses with a turnover of up to $10 million, for example, the risk of failure rose by 20 per cent in the year to the end of March 2024.

Industries most at risk of failure include food services — restaurants, bars, cafes and pubs — as well as construction and transport businesses.

“Because, for example, we have seen that spend with bakeries and butchers and other smaller food services businesses has really reduced over the last year,” observes Mr Hasseldine.

He adds that much of that demand has gone directly to larger companies with more pricing power.

“Smaller businesses are at significant risk of ‘going to the wall’ while larger businesses are benefiting from a possible change in consumer spending habits during these harder economic conditions,” he notes in the report.

“Spending in supermarkets, which has been up 5 per cent, has been to the detriment of butchers, down one 1 per cent, and greengrocers, down 2.5 per cent.

“Spending with department stores that has been broadly stable has been at odds with spending in retail clothing stores, down eight 8 per cent.”

It’s little surprise then that the odds of big businesses, those with turnover above $250 million a year, going bust has fallen 20 per cent at the same time as the financial risks for small and medium firms have surged.

Credit firm illion says there are no clear signs that the ‘at risk’ industries are likely to experience a turnaround in their fortunes anytime soon.

‘Fragile economy’, rising costs

The CEO of the Council of Small Business Organisations Australia (COSBOA), Luke Achterstraat, says it’s an ugly combination of lower revenue and rising costs for many of his members.

“Look, it’s a pretty fragile economy at the moment for small businesses,” he observes.

“There’s a lot of operating challenges we’re facing.

“Energy, rent, insurance, the cost of borrowing, the spectre of potentially another interest rate rise.

“So there’s a lot of uncertainty at the moment.

“There’s relatively strong demand coming through in some sectors but when that cost of doing business has increased exponentially, that makes it really difficult to trade.”

NAB’s chief economist Alan Oster says he’s monitoring the plight of small businesses closely.

“It’s a worry for us because normally small business leads into the broader economy and that’s certainly what we’ve seen in the ’70s, ’80s and ’90s recessions.

“So we’re watching that.

“But it does seem to us that when we say [to small business], ‘What’s your big concern?’, it’s, ‘I can’t get labour, or skills, I’m worried about government changes, and I’m worried about cashflow.’

“What it means, I think, is that as the small industries fall over, the big industries might start to come down as well.”

For now though, Mr Oster says big business is doing just fine.

In fact, the outlooks for the big supermarkets, financial and professional services sectors are all looking up.

And beauty business owner April Brodie notes her other high-end service for wealthier clients is performing well.

“Yes, the luxury end is doing incredibly well. I have a huge wait list,” she says.

“I have a six month wait list to get in to see me, but I’ve worked really hard on that and it was definitely a hole in the market and I worked really hard during lockdown to build that business out.”