Australian small businesses are in for another tough year, with insolvencies remaining high, economic pressures mounting, and global uncertainty adding to the strain.

CreditorWatch Chief Economist Ivan Colhoun warns that businesses should brace for continued challenges, including the impact of US policy changes under the Trump administration.

Insolvencies still on the rise

Business insolvencies hit record numbers in 2024, particularly in the construction and hospitality sectors. However, Colhoun notes that while insolvency rates are high in absolute terms, they remain moderate as a percentage of registered companies.

“Australian businesses face ongoing challenges, with insolvencies reaching record numbers in 2024, though as a percentage of registered companies, levels are more moderate,” he says.

A key factor driving insolvencies is the Australian Tax Office’s (ATO) return to normal debt collection practices post-COVID. Many businesses that built up tax debts during the pandemic are now struggling to meet their obligations.

“The ‘hands off’ approach to collections by the ATO during the pandemic may have played some part in the build-up of tax debts, though the dominant issue was still the multi-faceted shocks the COVID pandemic and associated policy responses brought to many businesses,” Colhoun explains.

Rising costs and tighter credit conditions

Macroeconomic pressures are another major hurdle. Rising interest rates, surging costs, and accumulated tax debts are taking a toll on businesses, particularly those in discretionary spending sectors.

“The cost-of-living crisis is also a cost-of-doing-business crisis, particularly for discretionary sectors,” Colhoun notes.

Additionally, access to credit remains tight, despite some improvements in late 2024. Colhoun warns that while there have been slight positive trends, businesses are still facing significant credit stress.

The Trump factor: Global uncertainty looms

One of the biggest unknowns for 2025 is the impact of US policy changes under the second Trump administration. The potential for new tariffs and trade restrictions could have far-reaching consequences for Australian businesses.

“The Trump administration’s tariff regime adds significant unpredictability to global trade and financial markets, which will impact Australian businesses indirectly,” says Colhoun.

Proposed US tariffs could slow global growth, weaken the Australian dollar, and create challenges for businesses involved in international trade. While Australia itself may not face direct tariffs, the broader economic effects could be significant.

“A substantial increase in US tariffs can be expected to slow global growth, raise US prices, and lower US share markets. The uncertainty over global growth and likely resultant lower prices for our export commodities may well keep the Australian dollar low,” says Calhoun.

Interest rate outlook

While the Reserve Bank of Australia (RBA) is not expected to cut rates immediately, a reduction may be on the cards for May 2025—provided inflation continues to moderate.

“We are not expecting a cut next week, but the RBA may cut rates again in May 2025 if inflation continues to moderate, but large cuts are unlikely due to ongoing government fiscal support,” Colhoun says.

Despite some recent improvements in trade payment defaults and economic indicators, the overall picture remains challenging for small businesses. Between rising costs, tax debts, and global uncertainties, business owners will need to stay agile and prepared for ongoing pressures in the year ahead.

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