The number of Australian companies that became insolvent or appointed administrators fell sharply during the COVID-19 pandemic, due to factors such as government financial support and relaxed insolvency laws.
However, Australian Chamber of Commerce & Industry CEO Andrew McKellar warns that more businesses are likely to collapse in the next six months or so, amid rising interest rates for business loans and increased cost pressures due to inflation.
He adds that the Australian Tax Office is also starting to focus more on outstanding debts after providing some relief during the pandemic.
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From The AFR:
Businesses administrations sank from 7300 to 4200 in 2020-21, and notched just under 5000 in 2021-22; but with inflation pushing up rices, interest rates on the rise and consumption slowing, that could be about to turn.
“We do expect in the next six months or so we will see business insolvencies and businesses going into administration – we’ll see those numbers pushing up. That is inevitable,” Mr McKellar said…
Louise Southall, chief economist for cloud accounting firm Xero, warned many small businesses had never experienced anything like the current uncertain inflationary environment…
According to Xero, about one in five small businesses experience a cash flow crunch – where expenses exceed revenue – at least 50 per cent of the year…
Equifax General Manager, Moses Samaha, noted this week via email that insolvencies are climbing, spreading beyond the construction sector to the broader economy:
Construction insolvencies continue to grow, increasing by 34% in May 2022 vs May 2021. However, we are seeing signs that construction has been the ‘canary in the coalmine’, with insolvency rates in the food services and accommodation and retail trade industries also starting to climb. As interest rates rise, small business owners in these industries will be under increased pressure, as they try to manage the impact of higher costs on both their personal and professional finances.
Separate data from Equifax shows that insolvencies were up 20% year-on-year in June:
Rising business failures seems inevitable amid soaring interest rates, cost inflation, and the reduction in household consumption, which is the main driver of the Australian economy.