Two reports find small business recovery lags big players

Two separate studies have confirmed the worst fears for Australian small businesses – that they are recovering much slower than larger enterprises and are more likely to hit the skids in this two-speed economy.

The State of Small Business Data Report, released by Square and The Council of Small Business Organisations of Australia (COSBOA), and Illion’s Commercial Risk Barometer released today, offer a snapshot of how small businesses have been coping with higher costs and patchy consumer demand over the past year.

Both find that the rate of recovery varies from state to state, with Sydney and Melbourne the most challenging markets.

The State of Small Business Data Report, compiled through analysis of millions of transactions processed on Square between January 2023 and June 2024, has found that while mid-market businesses dipped slightly into negative territory in the July and October quarters of last year before recovering to positive growth, small and mid-size business navigated a “longer and deeper period of negative growth”.

The report shows that these micro and small businesses recovered at a slower pace than their mid-market peers in the first half of 2024 compared to a year earlier.

The research also found that businesses in Brisbane had the strongest growth from late January to 1 May, at 10.49 per cent, compared with Sydney businesses which were the country’s growth laggards at 5.03 per cent.

The State of Small Business Data Report aligns with findings by credit bureau Illion in its Commercial Risk Barometer, which shows that after a tough 2023 the Australian economy is showing signs of recovery, but only for “mature and larger businesses at this stage”.

The barometer, which analyses the risk of business failure, says the risk has lessened for larger businesses, but younger and smaller firms continue to struggle.

“While the trend may ultimately point to a long-term improvement in business risk, our optimism is slightly muted when considering the outlook for certain industries and business segments, as the risk trend is not uniform,” says Barrett Hasseldine, Illion’s head of modelling.

“This is shown in the differences by geography, business age, business size and industry.”

Illion’s Commercial Risk Barometer reveals that the general improvement in business failure risk has been led by larger and mature businesses, with these organisations improving at 10 times the rate of small businesses in the second quarter of 2024.

“Comparing businesses by their size, we can see from the data that the risk of those businesses employing fewer than 20 people, such as family businesses, improved by 1 per cent from April to June 2024, whereas it improved by 2 per cent for businesses employing up to 100 people, and by 10 per cent in those employing more than 100 people in the same period,” says Hasseldine.

“Similarly, the risk of young businesses, operating less than five years, deteriorated by 7 per cent in the last quarter. In fact, only businesses operating for more than 20 years saw their risk improve below the level seen 18 months ago.”

The Illion report notes that Victorian businesses are struggling the most, with the data showing the failure rate in the state on the rise amid a turnaround in most other states.

“Based on the data, Victoria’s trend continues to worsen, other than for a brief spell post-Christmas,” says Hasseldine. “This may serve as a warning for business conditions in Victoria as we head into 2025.”

Hasseldine says South Australia is doing well but still has some way to recover from a slump it suffered up to March 2024.

“In NSW, the data shows there hasn’t been an improvement compared to the last quarter of 2023; that said, risk is not getting worse,” he says.

“Businesses in Queensland continue to operate with the best economic outlook, having both the lowest long-term rise in risk, 2.9 per cent higher in June 2024 than in January 2023, and a substantial improvement this year from April to June alone, down from 3.4 per cent higher at the end of March.”

According to Illion, the business sectors currently at greatest risk are education, training and financial services sectors, as well as food services and retail. However, construction may have turned a corner after a challenging couple of years, as reported today by Australia’s largest home builder Metricon.

“Growth in the construction sector is trending higher month-on-month, meaning that we may see a reversal in the two-tier economy in 2024-25, where the retail sector, food services and even smaller financial services businesses could falter, while construction may become Australia’s growth engine,” says Hasseldine.

“The economies of scale seem to be shifting and for those sectors in trouble, we are looking at a tough period post-Christmas if things don’t change.”

Meanwhile, the State of Small Business Data Report reveals spending through the December-January holiday period pushed small retailers into positive growth after most of 2023 was in negative territory.

Health care and fitness showed steadier spending patterns than beauty and professional services. Notably, hospitality businesses using Square posted a steady increase in spending, peaking in the April quarter this year.

The data shows businesses in Brisbane, Adelaide and Perth performed better than Sydney and Melbourne in the traditionally slower trading period after the Christmas-New Year break this year.