Q+A: Where SMEs are feeling the squeeze

Australia’s small and medium-sized businesses are under sustained pressure from higher costs, tighter cash flow and uneven economic conditions. 

Sean Aylmer speaks with CreditorWatch chief economist Ivan Colhoun about why capital city SMEs are failing at higher rates than regional businesses, which sectors are most exposed, and what the latest Business Risk Index reveals about the year ahead.

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Episode Transcript

Speaker 1 (00:05):
Welcome to Fearing Greed Q and A, where we ask
and answer questions about business, investing, economics, politics and more.
I'm Sean Aylmer. Australia's small and medium sized businesses are
under pressure right now. High rents, insurance bills, wage and
energy price hikes and cost of living pressures are impacting
cash flow and it's leading to a divergence in the economy,
with businesses in our high cost capitals showing a higher

(00:29):
failure rate than in regional areas. Ivan Calhoun is the
chief economist at creditor Watch, which has today released it's
November Business Risk Index. Ivan, Welcome to Fearing Greed Q
and A.

Speaker 2 (00:41):
Today, Sean, thanks for having me on.

Speaker 1 (00:43):
So just how much pressure our smmes under at the moment?

Speaker 3 (00:47):
Look, I think they've been under quite considerable pressure for
really twelve to eighteen months. When we try to model insolvencies,
the two dominant factors have been interest rates and costs
effectively inflation. So I think when I started twenty twenty

(01:10):
five and thought about what were the big forces affecting
the outlook, I did still have the big rises in
prices and costs that we saw out of COVID and
you hear we hear a lot about the cost of
living affecting consumers. Obviously, the flip side of that, or
the other side of the coin is anything that's a

(01:33):
cost of living is also a cost of doing business.
And during your introduction you talked about insurance and electricity,
all of those factors also affect businesses. And then of
course wages have gone up a lot in that period
as well.

Speaker 1 (01:48):
Okay, so in a sense we're kind of putting in
the costs that we all feel every day are the
same as as businesses feel. But in some markets is
it harder than others. So that this month's index suggests
that Sydney, Brisbane and Melbourne, I think that's kind of

(02:09):
where it's toughest of all.

Speaker 3 (02:11):
Yeah, and that's a relative thing. I think if you
looked between the capital cities, you would say that Sydney
has the highest costs.

Speaker 2 (02:20):
So we can understand that a little bit.

Speaker 3 (02:23):
Rents are higher, mortgages are higher, so the impact of
interest rates and rent rises tends to be bigger. We
can also find that the bigger capital cities tend to
have a little bit more competition. There's more businesses there
and some of the smaller regional centers don't have as

(02:44):
much competition, and they'll typically have businesses that have been
around for a lot longer. And if you have an
established brand and obviously you've managed a business for a
long time, it tends to.

Speaker 2 (02:57):
Be a little bit more secure as well.

Speaker 3 (03:00):
So we can look at those themes as running through
the data. And I think also Western Australia in most
of the economic data has been doing a bit better
than the rest of the other states, so that tends
to explain why it's doing a little bit better in
the numbers. And also I think South Australia, apart from

(03:23):
being a bit smaller, it's also had very very strong
population growth, so you can find that population growth has
been quite different. It's been better in Western Australia, better
in South Australia, better in Queensland than the other state capitals.

Speaker 1 (03:41):
What about regional areas generally, are they finding it easier
because of lower costs though I'm sure energy and insurance
and all those costs no difference for them to capital cities,
and they don't have the population of course to sell
stuff to either.

Speaker 3 (03:59):
Yeah, it tends to be a bit of the lesser
competition story is quite important there. You're right, a lot
of those costs will have gone up, but the rental
levels are typically a lot lower. In regional areas where
there has been a bit more pressure is probably some

(04:19):
of the lower income metropolitan regions we've certainly seen Western
Sydney and Southeast Queensland have been spots where there's been
higher business failure rates. Now we think part of that
is related to exposure to the construction sector, which has

(04:41):
been amongst the highest rates of insult not rates of insolvencies,
levels of insolvencies, and just generally also lower income tends
to make a business or the businesses in those lower
economic income areas tend to be have a slightly higher
business failure rate. We've seen that over many, many years.

Speaker 1 (05:05):
I haven't you've worked in big banks, you worked in airlines.
You're now kind of looking at the SME market. Is
the SME market a very discrete market compared to the
rest of the economy or does it sort of you know,
rising what is that rising tides floats or boats, or
maybe falling tides hurts all boats, whichever it is. I'm

(05:25):
just interested how different SMEs are look, I.

Speaker 3 (05:29):
Tend to think SMEs aren't super different. They don't generally
have as big buffers as big businesses do. They probably
don't have the resources. That said, there's some very very
well run small businesses.

Speaker 2 (05:47):
There's some very very.

Speaker 3 (05:48):
Well run big businesses and medium businesses. But the economy
is the sum of all the businesses in it.

Speaker 2 (05:56):
So it's a sub sector.

Speaker 3 (05:59):
It can sometimes lead the economy down it because it
doesn't have as much resilience as some.

Speaker 2 (06:06):
Of those big businesses. So I think that would be.

Speaker 1 (06:09):
Fair to say thank you for listeners. Ivan has actually
at an airport in Tasmania, which is what the background
noise was there before I let you go twenty twenty six.
What's looked like for SMEs and insolvencies.

Speaker 3 (06:23):
Yeah, look, it's interesting insolvencies have been trending a bit
lower recently. I put that down to the reduction cuts
in income tax in the middle of last year and
also the interest rate cuts that we've seen.

Speaker 2 (06:39):
The RBA delivered this year, so they've been helpful. So
we've seen that.

Speaker 3 (06:45):
We've seen also the boom in AI investment defense spending
overwhelm mister Trump's tariff EFFIX, so that was this year.
If we look forward to the big forces for next year,
I think the cost of living, the cost of doing business,
it's still there.

Speaker 2 (07:03):
It's not going away.

Speaker 3 (07:05):
It's quite possible the Reserve Bank will decide it shouldn't
have cut interest rates as much as it did this
year because inflation is still quite high.

Speaker 2 (07:16):
So that's an unwelcome.

Speaker 3 (07:18):
Development late in the year and it may see the
Reserve Bank unease some of those cuts, so that's not helpful.
Having said that, there is some good news. I think
some of the mining commodity prices have arisen quite a lot,
which is showing up a bit in West Australia and

(07:38):
Queensland as we speak. I think constructions looking a bit
better as well. We're seeing the federal government spending a
lot on housing, so I think it's going to be
a situation where we think insolvencies plateau rather than fall
a lot. They're not super high, it should be said

(07:59):
when you express it as a share of all the
businesses in Australia, which is now a very large economy
with an awful lot of businesses, so it's not diabolical,
so more leveling out and an economy with you know
some pressures, but not not horrendous and not fantastic.

Speaker 1 (08:20):
Either, Ivan, thanks for talking to fear and greed.

Speaker 2 (08:23):
Thanks for having me along, Sean.

Speaker 1 (08:25):
As Ivan Calhoun, chief economist at Credit or Watch. And
a reminder to please always seek professional advice before making
any investment decisions. I'm Shanelma and this is fearing greed
Q and a