Insolvency risks mount for small businesses

CreditorWatch said that deteriorating payment behaviour and persistently high ATO tax defaults are signalling rising insolvency risk over the next 12 months, particularly among sole traders and small businesses in fuel-dependent sectors.

The March Business Risk Index shows these pressures were already building before the latest energy shock, with elevated fuel costs now compounding an already fragile operating environment shaped by higher interest rates and weaker demand.

Trade payment defaults and tax arrears, both leading indicators of insolvency, have remained elevated in early 2026, reinforcing expectations that business failures are likely to increase in the year ahead.

While trade defaults improved slightly in the four weeks to mid-March, they remain at heightened levels, and tax defaults have recorded consistently high readings, with four of the past six months exceeding most of 2025.

CreditorWatch said that both measures are strong predictors of insolvency within a 12-month horizon, and recent trends suggest conditions are deteriorating rather than stabilising.

Sole traders most vulnerable

Sole traders are emerging as the most exposed within the business landscape. Despite accounting for 30 per cent of all businesses, they represent 54 per cent of large ATO tax defaults.

CreditorWatch said that this imbalance reflects structural vulnerabilities, with sole traders typically lacking the capital buffers and balance sheet separation available to incorporated entities. As a result, rising tax debts and cash flow pressures are translating more directly into insolvency risk.

Survival rates further illustrate this fragility. Only 50 per cent of sole trader businesses established between June 2021 and June 2025 remained active, compared to 68 per cent for companies. For those established in the 2021–22 financial year, just 38 per cent were still operating by mid-2025.

At the same time, business-related personal insolvencies rose 52 per cent from FY21 to FY25, indicating that business stress is increasingly spilling into household financial distress.

Insolvency data itself has been volatile but continues to reflect elevated levels, with early signs of a rising trend emerging even before the impact of recent interest rate increases and March’s energy-driven cost pressures.

Industry divergence

At an industry level, the data diverges. Retail and transport, postal, and warehousing are already exhibiting a deteriorating insolvency trend, with rising costs – particularly diesel – flowing quickly through supply chains and into consumer prices.

The federal government has since announced a raft of financial assistance to help businesses, including a temporary halving of the fuel excise on petrol and diesel and a $1 billion package of new interest-free loans.

By contrast, insolvencies in construction and food and beverage services remain elevated but are no longer worsening at the same pace.

CreditorWatch CEO Patrick Coghlan said the data highlights how quickly conditions are tightening for smaller operators.

“Small businesses are facing a much tougher operating environment than they were a year ago, and the pressure is showing in cash flow, payment defaults and tax arrears. Rising costs and higher interest rates mean even small shifts in business conditions can have outsized effects, particularly for sole traders,” he said.

“What matters is identifying those warning signs early, because once stress becomes visible at the insolvency stage, options narrow very quickly.”

Looking ahead, CreditorWatch maintains that interest rates and energy prices remain the key drivers of insolvency trends. Both have moved unfavourably in recent months, suggesting a more challenging credit environment is likely to persist.

Chief economist Ivan Colhoun said the trajectory of insolvencies will depend heavily on how these pressures evolve, particularly in the context of ongoing global energy uncertainty.

“Our previous analysis identified interest rates and energy prices as key drivers of the trend for insolvencies. Both have developed negatively in recent months, suggesting a less favourable credit environment in the months ahead,” Colhoun said.

[Related: Agriculture remains robust despite fuel and fertiliser shock]

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