Insolvency Issues Small Businesses Are Facing in 2025
Rising costs, weak growth, higher interest rates and the end of temporary support measures have all contributed to the growing pattern of insolvency across Australian businesses.
The number of companies entering external administration is now at the top of the range seen in the 2010s, reversing the pandemic-era lows (RBA, Financial Stability Review April 2025).
At Empirical Legal, we help startups, scaleups and SMEs navigate financial distress, from restructuring to winding up. We combine legal, business and technology expertise to deliver solutions that keep viable businesses trading and advise of the closure of non-viable ones. Our work includes advising on the small business restructuring (SBR) process, voluntary administration and liquidation, all while protecting owners from personal liability and ensuring compliance with the Australian Securities and Investments Commission (ASIC) and Australian Tax Office (ATO) rules.
Summary of the main insolvency issues in 2025
Small businesses in 2025 face four main insolvency challenges:
Rising insolvency rates.
Insolvencies are at their highest point in over a decade, particularly in construction and hospitality.Increased tax debt exposure.
Compared with pre-pandemic levels, the total collectable debt from insolvent small businesses has more than doubled, in part due to various payment plans and deferrals ATO offered as relief for small businesses during the pandemic.
Industry-specific pressures.
Fixed-price contracts in construction and reduced discretionary spending in hospitality are driving failures.Restructuring as a recovery pathway.
Uptake of the SBR regime is surging, with high survival rates for businesses completing the process.
Rising insolvency rates
Insolvency rates in 2025 are at the top of the range observed in the 2010s after a sharp rise over the past two years (RBA, Financial Stability Review April 2025). On a cumulative basis, they remain slightly below pre-pandemic trends but the catch-up from pandemic lows is still underway.
Before COVID-19, only 0.1% of firms entered insolvency each quarter on average, while around ten times as many exited simply by ceasing trade without formal insolvency (RBA, Financial Stability Review April 2025). During the pandemic, government support and temporary ASIC and ATO relief measures reduced insolvency rates by 46% between March-July 2020 compared with the same period in 2019 (Australian Government, Insolvency Reforms to Support Small Business Fact Sheet).
The increase in insolvency activity in 2025 is substantial. Between July 2023 and March 2024, 7,742 companies entered external administration, a 36.2% increase over the same period the year before (ASIC Corporate Insolvency Update - Issue 35). Across the 2023-24 financial year, more than 11,000 companies went into external administration, surpassing peaks from 2011-12 and 2012-13. CreditorWatch’s Business Risk Index adds further weight to this trend, reporting a 57% increase in insolvencies in the 12 months to November 2024. It forecasts business failure rates across all sectors to reach 5.6% in 2025.
For small business owners, these numbers signal that insolvency risk is a material operational consideration.
With those supports removed and economic conditions tightening, the trend has reversed. Older firms and those with pre-existing weaknesses are over-represented among insolvencies, suggesting that pandemic measures delayed rather than prevented many failures.
Increased tax debt exposure
The share of insolvent firms entering administration with tax debts exceeding $250,000 has risen by more than 10 percentage points since 2022 (RBA, Financial Stability Review April 2025). Total collectable debt from insolvent small businesses has more than doubled compared with pre-pandemic levels.
This surge reflects:
Deferred ATO payments during COVID-19 relief periods;
Accumulated liabilities as businesses prioritised operating costs over tax; and
Resumption of ATO enforcement actions from 2022 onwards.
In fulfilled SBR plans between July 2022 and December 2024, 87% of unsecured creditor dividends (around $88 million) went to the ATO (ASIC Report 810). For many SMEs, tax obligations are now the single largest unsecured liability in insolvency.
Industry and operational cost risks
Insolvency pressures are not spread evenly across sectors. Some industries are experiencing sharper increases due to their cost structures, revenue models or exposure to supply chain disruption.
Supply chain issues have persisted beyond the pandemic, driving up production costs and delaying deliveries. For businesses dependent on imported goods or just-in-time inventory, these delays can mean missed sales and penalty costs.
Rising operating costs are another persistent pressure. Wages, energy prices and insurance premiums have all increased in 2025. Small businesses with slim margins are struggling to absorb these rises without eroding profitability.
Sectors such as construction and retail, already under close regulatory scrutiny, are also facing tighter compliance and reporting obligations. This is adding administrative costs and increasing the risk of penalties for non-compliance.
Two industries dominate the recent insolvency data:
Construction
Accounted for 27% of all SBR appointments between July 2022 and December 2024 (ASIC Report 810).
Insolvencies rose sharply in 2023 due to high input costs, labour and material shortages and fixed-price contracts that left little room to absorb cost overruns.
Hospitality
Made up 23% of SBR appointments in the same period (ASIC Report 810).
Operators reported poor economic conditions as the most common cause of failure in 2024 (RBA, Financial Stability Review April 2025).
Many operate with slim margins and limited cash buffers, making them vulnerable to downturns in discretionary spending.
The concentration of insolvencies in these sectors highlights the role of industry-specific cost structures and revenue patterns in business survival.
Restructuring as a recovery pathway
The SBR regime, introduced in January 2021, is now being used at scale. There were 3,388 SBR appointments from July 2022 to December 2024, compared to just 82 in the 18 months after launch (ASIC Report 810). Appointments are expected to reach around 3,000 in 2024-25.
Key performance indicators:
87% of restructuring plans put to creditors were approved during the review period.
92% of finalised plans were fulfilled, meaning all obligations were met and debts released.
Around 93% of companies with a fulfilled plan remained registered as at April 2025.
The median dividend rate to unsecured creditors was 20 cents in the dollar, with most of that going to the ATO. Median practitioner remuneration was $21,998, stable from earlier reviews.
For viable businesses under $1 million in liabilities, the SBR process offers a faster, lower-cost and owner-controlled alternative to voluntary administration.
Why insolvency is rising despite contained financial stability risks
More than three-quarters of recent insolvencies involve businesses with fewer than 20 employees (RBA, Financial Stability Review April 2025). These small businesses typically have little or no secured debt, limiting direct risks to the banking sector.
Indirect risks, such as supplier losses, reduced employment and potential asset fire sales, remain low because:
Over 90% of workers from insolvent businesses are re-employed or retained within months;
Most insolvent firms do not hold assets likely to trigger market-moving fire sales; and
Non-bank lenders and suppliers face losses but these are contained in scale.
Practical steps for small businesses to manage insolvency risk
Monitor cash flow closely
Why it matters → Insolvency often follows extended cash shortages
Supporting data → RBA: Insolvency typically follows revenue falls, cost rises or margin pressure
Engage early with creditors and ATO
Why it matters → Delays increase liabilities and reduce options
Supporting data → ATO debts over $250k now 10 ppts higher than 2022
Consider SBR eligibility
Why it matters → High approval (87%) and survival rates (93% remain registered)
Supporting data → ASIC REP 810
Seek industry-specific advice
Why it matters → Construction and hospitality face unique pressures
Supporting data → 50%+ of SBRs come from these two sectors
Use registered practitioners
Why it matters → Avoid risks of illegal phoenix activity and non-compliance
Supporting data → ASIC: safeguards built into SBR regime
Key takeaways
In 2025, small business insolvency is being driven by a combination of post-pandemic adjustment, rising costs, industry-specific challenges and legacy tax debts. While financial stability risks are low, the personal and commercial impact on affected owners, employees and unsecured creditors is significant.
The sharp rise in small business restructuring shows that viable businesses can survive if they act early. For those beyond recovery, the simplified liquidation pathway offers a faster, lower-cost exit.
Empirical Legal is a corporate advisory and technology law firm for startups, scaleups and SMEs.
We combine legal, technology, and business experience and expertise to deliver practical, actionable advice and solutions.
If your business is facing mounting debts or cash flow pressure, contact Empirical Legal now to discuss restructuring options before insolvency becomes unavoidable.
Reach out to Empirical Legal today.