Every year, the Reserve Bank of Australia publishes a detailed assessment of small business economic and financial conditions through its Small Business Finance Advisory Panel bulletin. This report draws on the October 2024 and October 2025 editions, alongside firm-level administrative data, business surveys, and financial institution data, to provide an annual snapshot of SME financial health across Australia.
The headline is this: conditions improved between 2024 and 2025, but the improvement was uneven and fragile. Some industries recovered. Others continued to deteriorate. And the February 2026 cash rate increase to 3.85% has put the gains at risk.
This is our annual assessment of where Australian SMEs stand financially, which sectors are under the most pressure, and what the data suggests about the year ahead.
The RBA's October 2024 bulletin painted a picture of widespread but uneven stress. Demand growth had slowed while input costs remained elevated, squeezing profitability for businesses reliant on discretionary consumer spending. Survey measures of business conditions and confidence for SMEs were below long-run averages and weaker than for large firms.
Small retailers experienced notably more subdued sales growth than large retailers from late 2022, and this divergence persisted through 2024. Revenue growth for many small hospitality businesses was close to or below zero. Construction businesses faced cash flow pressures from higher costs, payment delays, and subcontractor insolvencies.
The bottom 25% of small businesses consistently made no or negative profits. For the very smallest micro firms, this share was even larger. These were the businesses most vulnerable to any further deterioration.
By October 2025, conditions had improved but not transformed. Survey measures of business conditions and confidence for SMEs had risen from their 2024 lows but remained below long-run averages and still weaker than for large businesses. Manufacturing and retail were the weakest sectors.
Profitability stabilised. ABS data to March 2025 showed the median operating profit margin for small businesses improved slightly over the year, with most industries reporting stable or marginally higher margins. Most small businesses remained profitable.
Cost growth eased, with non-labour costs moving closer to CPI inflation and wages growth moderating from recent peaks. An increasing number of businesses expected non-labour cost growth to converge with general inflation over the year ahead.
Businesses supported their margins through active cost management rather than revenue growth. The RBA noted that many SMEs implemented measures to reduce costs, including reducing staff or hours worked and improving productivity through technology and artificial intelligence. This is resilience, but it is defensive resilience. Businesses are holding the line, not advancing it.
Company insolvencies have risen sharply over the past two to three years, driven largely by small businesses with fewer than 20 employees. Hospitality and construction have been the hardest hit sectors, with insolvency rates in these industries elevated relative to pre-pandemic levels.
Context matters. During the pandemic, insolvencies fell to exceptionally low levels due to government support measures and the ATO pausing debt recovery actions. The subsequent increase represents a normalisation toward longer-run averages, not an unprecedented crisis. The RBA's 2024 bulletin noted that on a cumulative basis, insolvencies remained below the pre-pandemic trend. By 2025, the economy-wide insolvency rate had moved to around its longer-run average. The catch-up has largely played out.
But this does not mean the risk has passed. Business-related personal insolvency cases were up approximately 38% year on year in late 2025, suggesting the stress is migrating from companies to individuals. This matters for sole traders and business owners with personal guarantees on business debts, where company insolvency can quickly become personal insolvency.
The sectors showing the most elevated insolvency activity include hospitality (where weak discretionary consumer spending continues to pressure revenues), construction (where cost overruns, payment delays, and subcontractor chain failures persist), and retail (where the shift in consumer spending toward essentials and away from discretionary items has squeezed small operators).
During the pandemic, small businesses accumulated significant cash buffers, supported by government stimulus and precautionary saving. The RBA's 2024 bulletin reported that the median small business reached a cash buffer (measured as liquid assets relative to monthly operating expenses) similar to that of larger businesses by the end of the pandemic period. Prior to the pandemic, the median small business held buffers approximately 25% lower than larger businesses.
Those buffers have been drawn down. Bank liaison data referenced in the RBA's 2024 and 2025 bulletins suggests cash reserves for small and medium businesses have declined to around pre-pandemic levels, approximately three months of monthly operating expenses for the median business.
Industries with more flexible cost structures (such as hospitality and retail, where employment can be adjusted more quickly) tend to hold lower cash buffers, which makes them more vulnerable when conditions tighten. Industries with more fixed costs (such as professional services) tend to maintain higher buffers.
The practical implication: most SMEs now have less capacity to absorb shocks than they did two years ago. If economic conditions deteriorate further, or if the February 2026 rate increase persists, the buffer to absorb that pressure is thinner.
Based on the combined RBA data from 2024 and 2025, the industry-level stress picture looks roughly like this.
The cash rate increase to 3.85% in February 2026 reversed some of the easing that SMEs experienced through 2025. Variable lending rates for small businesses are back up, with major lenders passing through the full 0.25% increase.
For businesses that are already operating with thin margins and depleted cash buffers, this increase adds further pressure. On a $500,000 variable rate loan, 0.25% adds approximately $1,250 per year in extra interest. On a $1 million facility, $2,500.
For a hospitality business already in the high-stress category with minimal cash buffers, that additional $1,250 to $2,500 is not a rounding error. It compounds on top of rising wages, insurance premiums, and energy costs.
NAB survey data shows SME confidence dipped following the announcement, and loan applications have been flat. The risk is that businesses on the margin, those in the bottom quartile of profitability with depleted buffers, tip into distress.
The next RBA Small Business Finance Advisory Panel bulletin is due in October 2026. This report will be updated at that time.
The economy-wide company insolvency rate has returned to around its longer-run average after being exceptionally low during the pandemic. Hospitality and construction have the highest sector-specific insolvency rates. Business-related personal insolvencies were up approximately 38% year on year in late 2025.
Hospitality, construction, and retail trade face the highest stress levels, driven by weak consumer demand, cost pressures, and elevated insolvencies. Professional services, health care, and business services are the most resilient.
The majority are. RBA data shows the median operating profit margin for small businesses was stable or improved slightly through to March 2025. However, the bottom 25% of small businesses make no or negative profits, and these businesses are the most vulnerable to further deterioration.
The median small business currently holds approximately three months of monthly operating expenses in liquid assets, roughly in line with pre-pandemic levels. Businesses in higher-stress industries or with more fixed cost structures should aim for more.
Conditions improved from 2024 to 2025 but remain subdued. The February 2026 rate increase has dampened confidence. Whether conditions continue to improve depends on consumer spending trends, cost growth, and the path of interest rates. The recovery is real but uneven and fragile.
RBA Bulletin October 2025: Small Business Economic and Financial Conditions: https://www.rba.gov.au/publications/bulletin/2025/oct/small-business-economic-and-financial-conditions.html
RBA Bulletin October 2024: Small Business Economic and Financial Conditions: https://www.rba.gov.au/publications/bulletin/2024/oct/small-business-economic-and-financial-conditions.html
ABS Counts of Australian Businesses Including Entries and Exits: https://www.abs.gov.au/statistics/economy/business-indicators/counts-australian-businesses-including-entries-and-exits/latest-release
NAB Quarterly SME Business Survey: https://business.nab.com.au/category/business-research/
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