Trade Credit Market Update: FY25-26 Forecast

With the new financial year underway, this report provides an assessment of current market conditions and how they may influence the year ahead. We look at the core economic factors that are likely to shape FY25-26, the high-risk industries that must remain vigilant, the expected trade credit trends, as well as how to manage your business' trade credit framework for the best outcome. Being informed and proactive will be key to businesses' success over the next 12 months.

August 2025

As we enter FY2025-26, Australian businesses are operating in an environment shaped by continued volatility. Hopes of a sustained recovery late last year have been dampened by escalating geopolitical tensions, including a deepening U.S. trade rift and renewed conflict in the Middle East, both of which have clouded the global economic outlook.

CreditorWatch's May 2025 Business Risk Index offers cautious optimism, with B2B payment defaults and insolvencies beginning to stabilise. However, they remain high, and insolvency rates are rising even in traditionally stable sectors. The broader picture remains fragile, and pressures from inflation, interest rates, and external shocks are expected to weigh heavily on business confidence and recovery throughout the year.

Core Economic Factors Likely to Shape FY25-26

Inflation, Wage Stagnation & Business Cash Flow

While inflation has returned to the RBA's target range, the financial strain on businesses and households remains significant. Post-COVID price surges across energy, rent, insurance, logistics, and labour have become permanent, keeping operating costs well above pre-pandemic levels. Wages have not caught up, and unemployment has edged up to 4.3%, the highest in over three years¹, continuing to erode real purchasing power among consumers.

CreditorWatch's May data shows signs of stabilisation in insolvencies and B2B payment defaults, though levels remain historically high². Sectors tied to discretionary spending remain vulnerable, and the ATO's aggressive recovery of tax debt is adding further pressure to already tight cash flow, particularly for SMEs.

While inflation appears under control on paper, many businesses are still battling high input costs, cautious consumer spending, and depleted financial reserves as they enter FY2025-26.

Interest Rates

Following aggressive interest rate hikes to curb peak inflation of 7.8% in late 2022, the RBA began easing rates in 2025, with cuts in February and May. With inflation moderating but economic growth underwhelming, economists expect the RBA to accelerate rate reductions, potentially three more this year, with further easing likely in 2026³.

Ongoing geopolitical tensions add complexity. A prolonged Middle East conflict could trigger oil price spikes, straining Australia's economy given its 80% reliance on imported liquid fuels and limited reserves. Transport, which consumes the majority of these fuels, would be heavily affected⁴. Meanwhile, the war in Ukraine continues to pressure global gas and energy markets.

Rather than reacting to temporary inflation bumps, the RBA is expected to focus on supporting business activity and consumer confidence. For Australian businesses, lower rates may offer much-needed relief, but navigating the year ahead will still demand careful planning in an increasingly volatile global environment.

Trade War & US Tariffs

The U.S. is pursuing a hardline trade agenda under President Trump, who announced sweeping tariffs of up to 50% on most countries back in April. Although a 90-day pause was initially applied, that suspension expired on July 9, and the tariff framework has now begun rolling out starting with a 10% baseline tariff applied to most imports, including those from Australia.

Australia has not yet secured a renewed bilateral trade agreement and is currently subject to the default 10% tariff. Meanwhile, Trump has issued tariff "letters" to top trading partners like the UK, China, and Vietnam, offering them modified terms while smaller countries, including Australia, await further clarification. His offhand remark that he may simply 'send them a letter' continues to highlight the unpredictable nature of the current U.S. strategy⁵.

For Australian businesses, the risks remain twofold. If Australia is left without preferential treatment, exports to the U.S. may become more expensive, especially in sectors like agriculture, manufacturing, and resources. Additionally, the broader impact of tariffs on Chinese goods could suppress China's demand for Australian exports like iron ore, meat, and coal.

As global trade tensions escalate, businesses should prepare for possible export delays, weakened overseas demand, and increased volatility in both currency and commodity markets through FY2025-26.

Productivity

Australia's productivity growth has averaged just 0.4% per year since 2015, the weakest in over six decades. While long viewed as a slow-burning issue, it's now a top concern as wage growth stagnates, cost of living pressures persist, and economic momentum softens. As Dr Alex Robson of the Productivity Commission put it, this is no "flash in the pan", but a structural challenge requiring sustained focus from both government and business⁶.

The Albanese Government has made productivity reform a priority, though experts still debate the root causes, from underinvestment in technology and infrastructure to exhausted reform opportunities and outdated measurement tools⁷.

For businesses, this is less an immediate crisis and more an ongoing drag. In FY25-26, it may be felt as scaling constraints, tight margins, and skills shortages, particularly in sectors like tech, manufacturing, and construction that rely on efficiency gains to drive growth.

High Risk Industry Sectors to watch in FY25-26

CreditorWatch and ASIC have flagged the following sectors as carrying elevated insolvency risk in FY25-26:

Construction

Still the highest contributor to insolvency statistics.
Impacted by fixed-price contracts, labour shortages, elevated material costs, and delayed payments.
Many smaller operations are still dealing with tax debt from COVID and cannot absorb further cost shocks.

Retail (especially discretionary)

Cost-of-living pressures are curbing consumer spending.
High input costs (rent, wages, freight) are squeezing margins.
Stabilised insolvencies in the sector may still rise again if wage growth doesn't outpace inflation soon.

Hospitality

Thin margins, volatile cash flow, and heavy reliance on consumer sentiment.
Increasingly affected by wage pressures, utility costs, and insolvency contagion from commercial landlords.

Transport and Logistics

Highly sensitive to oil prices and interest rate shifts.
Australia's heavy reliance on imported fuel (80%) leaves operators vulnerable to Middle East shocks.

Expected Trade Credit Trends for FY25-26

As the economic environment remains challenging, trade credit conditions are shifting in response. Understanding these dynamics is crucial for managing credit risk and maintaining financial stability in FY25-26. These are the expected trends we're likely to see over the next 12 months.

Extended payment terms as businesses seek greater flexibility to manage their own cash flow. While this can help secure sales, it increases pressure on suppliers. Businesses should review their credit terms regularly and ensure they are appropriate to current conditions. Where longer terms are necessary, consider offering early payment incentives or negotiating staged payments to ease the burden.
Delays in payments often go unreported until they become defaults, making proactive credit monitoring essential. Strengthening debtor management processes, such as real-time credit checks, automated reminders, and regular follow-up, can help identify early signs of financial stress in customers.
Subcontractors and SMEs remain vulnerable in B2B chains, especially when dealing with larger firms known for slower payment cycles. These businesses should consider diversifying their customer base where possible, formalising payment terms in contracts, and exploring trade credit insurance to protect against non-payment.
The ATO's intensified tax debt recovery efforts may accelerate insolvencies across SMEs, particularly those still carrying tax deferrals from COVID lockdowns. Businesses in this position should seek tailored repayment plans with the ATO early.
More businesses taking up debtor insurance. With economic conditions still volatile, more businesses are turning to trade credit insurance to protect their receivables and strengthen their balance sheets. This trend is gaining momentum, particularly among SMEs and exporters looking to protect themselves against late or non-payment from newer or financially vulnerable customers.

The Importance of reviewing your Credit Management Framework

In a climate of economic uncertainty and shifting trade dynamics, it's more important than ever for businesses to conduct annual reviews of their credit management framework. This is particularly vital for organisations that serve a large number of smaller clients or operate across international markets, where risk profiles can vary significantly and change rapidly.

Regular reviews help ensure your approach to credit risk, such as credit limits, payment terms, risk appetite and debtor monitoring, remains aligned with current market conditions. For industries such as construction, manufacturing, wholesale trade, and import/export, where even one large default can trigger serious cash flow issues, a proactive, well-structured and adaptive framework can make all the difference.

Businesses should consider:

Tightening terms for higher-risk clients or sectors
Reassessing limits based on updated financial data or payment behaviour
Ensuring international clients are vetted against political and currency risk
Leveraging trade credit insurance or monitoring services for added protection

Your credit management framework shouldn't be a set-and-forget document. Reviewing and refining it annually, or more frequently in high-risk sectors, helps build resilience and supports long-term business continuity.

How Coverforce can help

Trade Credit Insurance plays a vital role in protecting your business against the risk of customer non-payment, especially in today's unpredictable economic environment. At Coverforce, we're one of the few insurance brokers in Australia with a dedicated in-house team specialising in Trade Credit Insurance. We work closely with businesses of all sizes to deliver tailored, cost-effective insurance solutions that protect against debtor defaults and support growth, both locally and internationally.

Debtor Insurance can strengthen your credit risk strategy, read about our Trade Credit Solutions here.

REFERENCES

https://www.reuters.com/world/asia-pacific/australia-unemployment-rate-climbs-3-12-year-high-june-2025-07-17/
https://creditorwatch.com.au/blog/stress-subsides-payment-defaults-drop-sharply-in-may-insolvencies-stabilise
https://au.finance.yahoo.com/news/shock-to-force-rba-to-cut-interest-rates-further-than-expected-more-aggressive-003256727.html
https://theconversation.com/oil-shocks-in-the-1970s-drove-rapid-changes-in-transport-it-could-happen-again-if-middle-east-tensions-continue-259670
https://theconversation.com/im-going-to-send-letters-the-deadline-for-trumps-reciprocal-trade-tariffs-is-looming-259983
https://www.pc.gov.au/ongoing/productivity-insights/bulletins/quarterly-bulletin-march-2025/bulletin-march-2025.pdf
https://au.news.yahoo.com/trade-offs-cards-productivity-back-173000657.html

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