Business Debt in Australia: What Happens & How to Get Out of It
Is it normal for a business to be in debt? More than you’d think, mate. Sometimes it’s necessary to start a business with debt in tow, a bank loan that allows you to get things off the ground. In Australia there are thousands of businesses currently in debt, some of which can make ends meet and others who won’t be so fortunate.
The ATO is pursuing more than $50 billion in collectible tax debt, with small businesses accounting for close to two-thirds of that pool, confirmed by ATO Commissioner Rob Heferen in a February 2025 address to the Senate Economics Legislation Committee, so if your business is struggling, you’re definitely not alone.
Whether you’re asking can my business recover from major debt, or you want to stay ahead of it, this guide covers the causes, the warning signs, what happens next, and the real steps to get your business finance back on track.
Key Highlights
- Causes of Business Debt: Businesses often fall into significant debt due to poor cash flow, extended credit terms, unexpected costs, and operational inefficiencies. Key warning signs include overdue tax, high-interest loans, and rising owner stress.
- Getting Out of Debt: Tackle business debt by negotiating with creditors, consolidating or refinancing loans, and cutting costs. A good accountant can guide recovery.
- Staying Debt-Free: Avoid bad business debt by monitoring cash flow, maintaining reserves, enforcing payment terms, and keeping fixed costs low. Plan ahead for slow periods and know your break-even point.
- 2025–26 ATO Alert: From 1 July 2025, the General Interest Charge on overdue ATO debts is no longer tax-deductible, under the Treasury Laws Amendment (Tax Incentives and Integrity) Act 2025, now law. This applies to all GIC incurred on or after 1 July 2025, regardless of when the underlying debt arose.
The Most Common Reasons Businesses Get Into Debt
Each of these causes is something we see regularly with business clients across Melbourne and beyond. Catching them early is what separates a rough patch from a full-blown financial failure.
Poor Cash Flow Management
Number one is always poor cash flow management. Keeping track of income and expenses, timing of payments, setting a budget, the list goes on. These are all common mistakes we see with business clients. Often it’s just about education and becoming well versed on what responsible cash flow management looks like. This is one of the biggest reasons to have an excellent accountant, someone to ask before spending big on another piece of equipment, or to pick up on poor cash flow management before it becomes a hole that’s too deep to dig out of.
Over-Extending Credit Terms
More specifically, over-extending credit terms are a huge cause of cash flow issues. When too much credit is extended to customers, for instance, continued supply of coffee beans to a café already overdue on the last two months of payments, big amounts of owed cash build up unpaid. This has a ripple effect on the entire business: they can’t pay their own suppliers, and the cycle continues.
Unexpected Expenses
Unexpected expenses like recruitment costs, losing team members, accidents, natural disasters such as flooding or bushfires, and equipment breakdowns can catch businesses out when they simply don’t have the cash reserves to absorb the hit.
Inefficient Operations
Inefficient operations includes things like not pricing correctly, costs outweighing income, and failure to raise prices when the cost of goods increases.
This is where business advisory comes in. A good business advisor or Virtual CFO (VCFO) will spot the inefficiencies before they cost you your business, whether that’s pricing that doesn’t cover costs, margins eroding without anyone noticing, or overheads that have crept past what the revenue supports.
Finally, intensely competitive industries with low margins put pressure on businesses to lower prices to win work. Volume home builders are a textbook example, many found themselves locked into fixed-price contracts that no longer reflected skyrocketing labour and material costs, with painful results.
The Tell-Tale Signs That Business Debt Is Getting Out of Hand
Debt rarely announces itself all at once. These are the signals that it’s quietly taking over.
The most obvious signs are falling behind on payments to the ATO for GST, PAYG, and Income Tax, or failing to meet superannuation obligations on time. Late super leads to more debt through fines and admin fees, a vicious cycle. These late payments often indicate more significant financial problems that will compound if not addressed.
Taking out high-interest loans or maxing out credit cards are short-term buffers that signal cashflow problems, neither is a long-term fix. Relying on them repeatedly is a clear warning sign that your business finance is deteriorating.
2025–26 ATO Update: The ATO has resumed pre-COVID debt recovery practices, and then some. In 2024–25, the ATO issued 84,529 Director Penalty Notices to individual directors of approximately 64,000 companies, covering $5.5 billion in liabilities, a 136% increase on the 26,702 DPNs issued the prior year (ATO 2024–25 Annual Report, confirmed by the Tax Ombudsman, March 2026).
Tax debts over $100,000 can now be reported to credit bureaus. And from 1 July 2025, the General Interest Charge (currently around 11%, check the current ATO rate here, updated quarterly) on overdue ATO debt is no longer tax-deductible, making it 30–45% more expensive to carry in real terms, the exact increase depends on your marginal tax rate. For a company taxed at 30%, the after-tax cost of GIC rises from roughly 7.7% to 11%. For a sole trader on the top marginal rate, the increase is even larger. If your business has ATO debt, the window to act cheaply is closing fast.
Another key thing to watch is the stress levels of the business owner. As debt increases, mental and physical health are often the side effects that need the most immediate attention. Debt creates personal anxiety that negatively affects decision-making, productivity, and relationships. Keeping a balanced life and seeking support when needed is vital during difficult financial times.
What Can Happen When a Business Gets Into Significant Debt
When company debt becomes unmanageable, businesses typically face one of three outcomes. Here’s what each looks like in practice.
Liquidation, Voluntary Administration or Bankruptcy
If restructuring doesn’t work, liquidation may become the last resort, a business’s assets are sold to repay debts and operations cease. Voluntary administration offers a temporary reprieve where an external administrator tries to negotiate a viable solution with creditors.
Bankruptcy, while offering protection from creditors, can have long-lasting effects on the owner’s personal finances and future business opportunities. For sole traders and partnerships, personal bankruptcy is possible and business-related personal insolvencies accounted for 28.8% of all new cases in 2024–25 (Australian Financial Security Authority, Personal Insolvency Statistics 2024–25) .
The Business Fails
According to ABS data (Counts of Australian Businesses, 2024–25), around 75% of new businesses survive their first year. The three-year survival rate, however, is approximately 48–52% across all businesses, meaning around half fail within three years, not 60%, with poor cash flow and unmanaged business debt among the leading causes.
Without sufficient cash flow, a business can’t cover essential operations, leading to a rapid decline in overall business health. According to CreditorWatch’s Business Risk Report (December 2024), 33.6% of private businesses with ATO tax debt defaults above $100,000 that were more than 90 days overdue had either become insolvent or voluntarily closed within the prior 12 months.
Business Restructuring
The Small Business Restructuring (SBR) regime was designed for exactly this situation, a business with real underlying value that’s been swamped by debt. Unlike voluntary administration, you stay in control. A registered restructuring practitioner comes in to help you develop a plan, creditors vote on it, and if it’s accepted, you trade forward under the new terms while debts are cleared.
To be eligible, your business needs total liabilities under $1 million, all tax lodgements current, and employee entitlements up to date. The ATO has been an active and generally constructive participant in SBR processes, including being willing to compromise on core tax debt, something that is genuinely not possible outside a formal insolvency process.
SBR uptake has grown significantly, from 448 appointments in 2022–23 to approximately 3,000 projected for 2024–25. If this sounds like your situation, speak to a registered restructuring practitioner and your accountant before taking any other steps. Getting the sequencing right matters.
How Can a Business Recover From Debt?
If your business is in debt right now, the good news is there are real, practical options available, and the earlier you act, the better your chances of a full recovery.
Negotiate with Creditors
Your first port of call is to negotiate with creditors, asking to restructure payments and get a manageable plan in place. Most creditors would prefer to receive some payment rather than none, so they may be open to better terms, especially if they believe you can get back on your feet. Be transparent about your financial situation and offer a realistic repayment plan.
Debt Consolidation
Debt consolidation is key. With multiple credit cards or high-interest loans, there may be an opportunity to consolidate into a single, lower-rate facility. This simplifies repayments and lowers the overall cost of the debt, giving you a better chance to regain control.
Refinancing
Refinancing is another strong option, particularly if your main creditor is the bank. Speaking to a good broker is paramount. Refinancing restructures existing loans under better terms, reducing monthly repayments and making company debt more manageable. With the RBA’s recent rate cuts flowing through in 2025, now is a reasonable time to explore refinancing options.
Cost-Cutting Measures
Work with your accountant or advisor to understand where costs can be cut and by how much. Even small savings in non-essential areas add up over time and improve cash flow. Renegotiating supplier contracts can free up cash for more urgent debt repayments. Review your subscription and software stack, recurring costs that made sense when the business was growing often survive longer than they should. A quick audit of your monthly direct debits with your accountant can surface surprising savings without touching operations.
Implementing carbon accounting is another area worth exploring, it can uncover operational savings alongside reducing your environmental footprint.
Seek Free Government Support
Many business owners don’t know that free, confidential help exists. The Small Business Debt Helpline (1800 413 828) connects you with qualified financial counsellors who can help you negotiate with the ATO, work through creditor arrangements, and explore your restructuring options, at no cost. Call Monday to Friday, 9am–5:30pm AEST, or use their live chat service. In 2025, the Helpline assisted 6,205 businesses, a 21% increase on the prior year, with the median ATO debt size sitting at $70,000 according to Financial Counselling Australia‘s annual data.
How to Avoid Business Debt in the First Place
Prevention is always cheaper than the cure. These eight habits are what separate businesses that stay financially healthy from those that don’t.
1. Monitor Cash Flow
Regularly monitoring your cash flow is one of the most important ways to avoid falling into debt. Keeping an eye on money coming in and going out helps you stay ahead of potential issues before they become big problems, and before the ATO comes knocking.
2. Maintain a Healthy Bank Balance
Having sufficient funds in your account means you can cover unforeseen expenses without resorting to high-interest loans or credit cards. A buffer also ensures you can continue operations during lean periods without disruption.
3. Strong Invoice Terms and Payment Processes
Clear invoice terms, including payment deadlines and penalties for overdue accounts, help ensure you get paid on time. Follow up on overdue invoices consistently. Strong payment processes keep your cash flow healthy and reduce the likelihood of bad business debt building up on your books.
4. Manage Debt Effectively
Don’t rely on the money that should be going to the ATO or other creditors to cover day-to-day expenses. With the ATO’s toughened stance, DPNs up 136% in 2024–25, credit bureau reporting for debts over $100K, and GIC no longer deductible from July 2025, treating the ATO as a short-term lender is riskier than it’s ever been.
5. Diverse Revenue Streams
Relying too heavily on one source of income makes your business vulnerable. Any disruption to that income can create significant cash flow issues. Expanding services, products, or market segments reduces the financial strain and lowers the risk of falling into significant debt.
6. Minimal Fixed Costs
Understand the difference between fixed and variable costs. Fixed costs like rent and insurance don’t change regardless of revenue, minimising these gives you more flexibility when revenue fluctuates.
7. Know Your Break-Even Numbers
Your break-even point is the level of sales needed to cover all costs with no profit or loss. Once you know it, you can make smarter decisions about pricing, expenses, and growth, and avoid sliding into business debt without realising it.
8. Plan Ahead for Slower Periods
Most businesses experience seasonal downturns. Building reserves during busier months gives you a financial cushion for the slower ones, so you’re not scrambling to cover payroll or super obligations when things go quiet.
Frequently Asked Questions About Business Debt in Australia
These are the questions we hear most from business owners, answered plainly, without the jargon.
Is it normal for a business to be in debt?
Yes, carrying some level of business debt is completely normal, especially in the early stages. Many businesses use loans to fund equipment, premises, or growth. The key question is whether the debt is structured and manageable, or whether repayments are starting to disrupt day-to-day operations. The ATO is currently pursuing over $50 billion in collectible tax debt, with small businesses making up around two-thirds of that, so if you’re struggling, you’re far from alone.
Can my business recover from major debt?
In many cases, yes, but timing matters. Recovery depends on how early you act and which tools you use. Options like the Small Business Restructuring (SBR) regime, debt consolidation, creditor negotiation, and working with an experienced accountant or VCFO can all support recovery from significant debt. The businesses that come back strongest are those that seek help before things get completely out of hand.
What happens if a business can’t pay its debts?
If a business cannot pay its debts, it may face voluntary administration, liquidation, or bankruptcy, depending on the business structure. For sole traders and partnerships, personal bankruptcy is an option. For companies, voluntary administration gives directors a chance to negotiate with creditors before formal liquidation occurs. The ATO can also issue Director Penalty Notices (DPNs), making directors personally liable for unpaid PAYG, GST, and superannuation, and in 2024–25 alone, the ATO issued 84,529 DPNs.
Directors have just 21 days from the date the notice is posted, not the date it arrives, to either pay the debt, enter a payment arrangement, or appoint a restructuring practitioner or administrator. Do nothing in that window and personal liability locks in. Given the ATO issued 84,529 of these notices in 2024–25, receiving one is no longer a remote risk.
What does “business finance turns on debt” mean?
This phrase refers to how most businesses fundamentally rely on some form of debt to operate and grow, whether that’s a business loan, credit facility, or supplier credit. Debt is often the engine that turns the wheels of business finance. It only becomes a problem when the cost of servicing that debt outpaces what the business can generate.
What is bad business debt?
Bad business debt refers to money owed to a business that is unlikely to be recovered, typically from customers who haven’t paid and show no intention of doing so. It can also describe debt taken on at unfavourable terms, like high-interest short-term loans, that deteriorate your financial position. Bad debt write-offs may be tax-deductible in Australia, speak to your accountant about how to handle them correctly in your accounts.
How is the ATO handling business debt in 2025–26?
The ATO has returned to, and in some ways surpassed, its pre-COVID enforcement approach. In 2024–25, it issued 84,529 Director Penalty Notices (a 136% increase on the prior year), targeting $5.5 billion in liabilities. Tax debts over $100,000 can now be reported to credit bureaus. And from 1 July 2025, the General Interest Charge on overdue ATO debt is no longer tax-deductible, making the effective cost of carrying tax debt approximately 33% higher than before. Lodging outstanding returns, even if you can’t pay right now, is still the best first step.
What is the Small Business Restructuring (SBR) regime?
The SBR regime, introduced in January 2021, allows eligible small businesses with total liabilities under $1 million to restructure debts while directors remain in control (ASIC: Small Business Restructuring). The $1 million threshold has not been adjusted since the regime’s introduction in January 2021.
Unlike voluntary administration, it’s faster and less costly. The ATO has been an active participant in SBR processes and has shown willingness to compromise on core tax debt, something that’s not possible outside a formal insolvency process. If you’re considering SBR, speak to a registered restructuring practitioner and your accountant first.
Where can I get free help with business debt in Australia?
The Small Business Debt Helpline (1800 413 828) provides free, confidential support from qualified financial counsellors, Monday to Friday, 9am–5:30pm AEST. You can also contact the ATO directly on 13 11 42 if you can’t meet your tax or super obligations on time. For mental health support alongside the financial stress, Beyond Blue’s NewAccess for Small Business Owners program (1300 945 301) offers free one-on-one coaching. And if you want expert accounting and advisory support with a human touch, get in touch with the Future Advisory team.
A good advisor and/or accountant will mean, in most instances, that problems are solved before the business debt gets completely out of hand.
If you need to chat cashflow, budgets or debt, get in touch with the team at Future Advisory.
