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Rising Business Failures Stalk Australian Economy – RBA

Rising Business Failures Stalk Australian Economy – RBA

(12 October 2020 – Australia) The Reserve Bank of Australia (RBA) predicts the frequency of small business failures will increase significantly as revenue and loan servicing pressures pile up.

With government stimulus and over than A$200 billion in loan deferrals set to expire, the central banks estimates that up to 15 percent of enterprises in the worse affected sector verticals such as tourism and transport will exit the industry as cashflow constraints cripple their operations. The number of business insolvencies has been artificially low since the onset of the coronavirus pandemic trading restrictions in late Q1 2020 as the government allowed owners to continue operating despite mounting debts.

While helpful at the time, various groups have warned that all that may do is create a business blowout further down the line, that will have even larger ramifications as owners scramble to settle with their creditors.

“These businesses are in a tenuous position and are particularly vulnerable to a further deterioration in trading conditions or the removal of support measures. Survey evidence indicates that about one-quarter of small businesses currently receiving income support would close if the support measures were removed now, before an improvement in trading conditions” the RBA stated in its Financial Stability Review.

“A sizeable portion of small-to-medium-sized business loans are also secured by residential property and so difficulties experienced by these businesses could also lead to more forced sales and downward pressure on housing prices”

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