Optimism amid business conditions worsening

As such, the combination of these factors is causing financial strain, leading to heightened credit default risk and decreased business credit demand.

Equifax’s Quarterly Commercial Insights for June 2023 revealed a decline in overall business credit demand by 1.3 per cent in 2Q23, primarily driven by a substantial fall of 4.0 per cent in business loan applications compared to the same period last year.

Additionally, commercial trade payments also dropped by 2.1 per cent, while asset finance applications saw an increase of 7.8 per cent.

One of the significant indicators of the economic downturn is the deterioration in business conditions for SMEs (small and medium-sized enterprises).

According to the National Australia Bank (NAB), SME business conditions fell by 11 points to +1 index point in 2Q23, below the long-run average of +6.

NAB’s chief economist Alan Oster expressed concern, stating that smaller firms were starting to feel the impact as confidence remained negative, with further deterioration expected.

“Importantly, forward orders for SMEs have also fallen into negative territory which is a sign that things may deteriorate further,” Mr Oster said.

In addition, almost three-quarters of SMEs continue to struggle to find suitable labor, while cost pressures remain high, slightly easing only for purchase and labour costs.

Some businesses hopeful

However, despite the difficult economic environment, some businesses are still thriving and seeking growth opportunities.

Mortgage broker Karlie Scharfenberg from The Loans Suite said her business clients were “kicking goals”, reporting a steady amount of business lending inquiries over the last quarter.

She said many self-employed applicants were performing well, and there was significant interest in cash flow lending, new business start-ups, and commercial property purchases.

“There is a lot of infrastructure in the local area and businesses are doing really well,” Ms Scharfenberg said.

“I have been lucky to be able to identify clients needs and have quality conversations with them about their business, to be able to assist them with guidance and where to place their lending needs.”

According to the ScotPac SME Growth Index, a substantial 56 per cent of SMEs forecast positive revenue growth over the next six months, marking the highest growth outlook for the sector since March 2016.

This indicates a “two-speed economy”, where certain businesses remain optimistic about their future prospects.

Insolvency rates on the rise

Nonetheless, despite pockets of optimism, the overall financial stress on Australian businesses is evident.

Equifax’s data showed a significant surge in insolvency rates, with a 45 per cent increase in 2Q23 compared to the same period in 2022, and a staggering 75 per cent increase compared to the same period two years ago.

May 2023 also witnessed the highest number of reported insolvencies in the past 12 months, with 866 entities facing insolvency.

Equifax’s general manager of commercial and property services Scott Mason said sole traders and SMB owners across various sectors are experiencing a rise in early stage (30+ days) mortgage arrears, with the construction sector being hardest hit.

In Q2, 2023 construction sector sole traders were 60 per cent more likely to have arrears compared to the average consumer with no commercial relationships.

Late-stage (90+ days) mortgage arrears are also on the rise, with SMBs in the construction industry being 13 per cent more likely to be in late-stage arrears compared to the previous year.”

“This suggests that these operators are putting money into the running of the business and not paying themselves what they previously would – and as a result, their mortgage payments are starting to lapse,” Mr Mason said.

[Related: SMEs split on future optimism]