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Business failures on the rise

More than 10,000 businesses have fallen over in the past 12 months. In a worrying sign for lenders the numbers jumped 10% in the September quarter. It could also be bad news for entrepreneurs looking to set up new businesses, as credit may be just that bit more difficult to get.

Related: More pain for bank shareholders

According to statistics released by the Australian Securities and Insurance Commission, 10,757 businesses were wound up in the last 12 months, with NSW companies accounting for 4,332 of those. That figure has only been beaten once in the last 10 years, at the height of the GFC, when 4,487 NSW businesses entered administration.

Victoria has recorded 2,744 businesses entering administration – more than during the GFC, when 2,616 businesses were wound up. All other states also recorded higher numbers over the past year than during the 2008-2009 period.

This is a worrying sign for major lenders, including the big four banks, Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank (ASX: NAB), Westpac Banking Corporation (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA).

With slowing credit growth, the last thing the banks need is businesses they lend to, falling over. That may prompt the banks to increase their bad debt provisions. NAB and Bank of Queensland (ASX: BOQ) have already reported profit downgrades on the back of higher provisions, and more provisions may be announced by the banks.

There was some good news for the banks though today, with home loan approvals rising by 0.9% in September, compared to the previous month, according to the Australian Bureau of Statistics. Economists had expected the number of loans to rise by 1%. Total housing finance rose by 3.8% to $21.2 billion.

Foolish takeaway

The number of businesses failing is a concern, not just for the banks, but also the Australian economy. With more businesses going into administration, it usually means more people are dependent on social security income, and potentially higher unemployment. Worrying signs indeed.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.  The Motley Fool ’s purpose is to help the world invest, better.  Take Stock  is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  Click here now  to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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