SMEs under pressure as arrears hit 6-year high

The April Business Risk Index from the credit reporting agency found payment arrears had climbed to their highest level since January 2020, with more businesses struggling to pay invoices on time.

CreditorWatch said the data pointed to financial stress emerging earlier in the economic cycle, with deteriorating payment behaviour indicating “structural vulnerabilities rather than a normal cyclical downturn”.

CEO of CreditorWatch, Patrick Coghlan, said the data showed that broader macro-economic pressure was now translating into measurable cash flow stress.

“More invoices are sliding beyond 60 days overdue, and the stress is concentrated in sectors central to household spending, supply chains and small business employment,” he said.

“Businesses extending credit should be watching customers more closely, acting earlier and using live risk signals rather than waiting for problems to become visible in arrears or payment defaults.”

The report found pressure was not evenly spread across the economy, with hospitality, transport, construction, and manufacturing among the sectors recording the highest insolvency and late-payment rates.

In response, some lenders have opened up new faster avenues for credit, while the federal government has announced a $1 billion package of new interest-free loans to support businesses most affected by fuel shortages.

Indeed, while many SMEs are turning to finance to shore up their position and stabilise cash flow, access remains an issue.

According to one recent study, 40 per cent of SMEs identified access to finance as the single largest obstacle to growth, while a further 15 per cent said they were struggling to access grants that could support expansion.

‘Three-way squeeze’

The report found Australian businesses were being hit by a “three-way squeeze”, with inflation and energy costs increasing operating expenses, higher interest rates tightening debt-servicing capacity, and softer demand limiting the ability to pass on costs.

In analysis by National Australia Bank (NAB), it was found that input costs were increasingly outpacing price growth, putting pressure on margins and adding to concerns about inflation and further interest rate hikes.

NAB’s data indicated that purchase cost growth accelerated sharply to 4.5 per cent in quarterly equivalent terms in April, three times higher than February levels, while final product price growth rose to 1.8 per cent.

NAB chief economist Sally Auld described the price increase as “eye-watering”.

“This data really syncs with the anecdotes that we’re getting from our business customers at NAB, who are constantly telling us that their suppliers are saying to them that when the next invoice lands, they’re going to see plus 20–30 per cent on some inputs,” she added.

The Reserve Bank of Australia’s recent rate increases are also contributing to the pressure, according to the report, with the cash rate target lifted by 25 basis points to 4.35 per cent.

CreditorWatch chief economist Ivan Colhoun said businesses were facing growing uncertainty as higher input costs and interest rates weighed on conditions.

“The surge in input costs and retail prices add to prior cost of living and cost of doing business pressures and can be expected to lead to weaker business conditions in coming months unless the Strait of Hormuz reopens relatively soon,” he said.

“The third successive interest rate increase by the RBA to address Australia’s pre-existing above-target inflation will add additional pressure to businesses and consumers in coming months.”

Colhoun added recent economic conditions had become increasingly difficult for operators.

“This uncertainty is of course very difficult for businesses,” he said.

“Encouragingly, the outlook for the Australian economy seemed to be improving ahead of the Iran conflict, though recent interest rate rises will no doubt be a headwind across the second half of the year.”

ATO debt and looming regulation

CreditorWatch also reported rising ATO debt defaults, with three of the four highest monthly inflows since post-COVID-19 enforcement resumed recorded in the past four months.

Sole traders accounted for 54 per cent of outstanding tax debt defaults greater than $100,000, with the report noting smaller operators generally had fewer capital buffers and less ability to absorb higher costs or slower payments.

Lastly, SMEs will be eyeing the changes to Payday Super, which are due to begin on 1 July 2026.

The changes, which will require employers to pay super alongside wages, could have significant impacts on cash flow, with research indicating that the reforms could reduce SME borrowing power by as much as 15 per cent.

In the wake of such pressures, industry bodies, such as the Mortgage and Finance Association of Australia, have urged small businesses to seek advice from brokers and other professionals.

[Related: Business confidence collapses despite resilient conditions]

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