Shift from bank funding aligns with rising insolvency court actions by non-bank lenders
Small business insolvency pressure across Australia remains high, with non-bank lenders now responsible for a growing share of court-based enforcement as major banks reduce their recovery actions, according to new data.
Analysis from the latest Alares Credit Risk Insights report shows that non-bank lenders have steadily increased court recoveries since 2019, reaching record or near-record levels. The pace accelerated through 2023 and 2024 and has stayed high into 2025.
Source: Alares
By contrast, court activity by the big four banks peaked in 2024 before easing in 2025, signalling a clear shift in which creditors are pursuing formal enforcement.
“From an insolvency perspective, enforcement pressure hasn’t fallen – it has shifted,” said Andrew Spring, partner at Jirsch Sutherland. “While the Australian Taxation Office (ATO) remains the dominant source of court action, non-bank lenders are accounting for an increasing share of insolvency-related enforcement as the major banks step back.”
The change comes as many small and medium-sized enterprises (SMEs) move away from traditional bank funding.
“As banks pull back on SME lending, more businesses are turning to non-bank lenders,” Spring said. “With credit tightening and risk appetite shrinking, traditional finance is getting harder to secure, pushing many SMEs toward alternative funding at a time when they can least afford it.”
The shift in enforcement is occurring against a backdrop of persistent growth in insolvency appointments. After a brief fall in November 2025, insolvencies rose again in December, with year-on-year volumes once more exceeding 2024 levels. On an annual basis, insolvency numbers have tracked upwards since their lows during the COVID period.
Source: Alares
The Alares report also indicates that overall insolvency-related activity rose from about 30,000 affected businesses for much of 2025 to more than 32,000. At the same time, ATO court recoveries remain well above historic norms, and direct ATO actions against both companies and individuals continue to increase even as personal bankruptcy sequestrations stay relatively subdued.
Patrick Schweizer, director at Alares, said the data suggests a structural change in lending and recovery behaviour since the pandemic.
“After COVID, both the big four banks and non-bank lenders steadily increased their court recoveries,” he said. “However, the big banks did a U-turn in 2025 and started decreasing their court activity, whereas non-bank lenders continued to increase at an even higher rate.”
Schweizer linked the divergence to how and where credit risk is now being written. “Speculating on cause and effect is always difficult, but I suspect the big four are now heavily focused on very low-risk lending, particularly residential mortgages and blue-chip corporates,” he said. “This is pushing SMEs and borrowers with less-than-perfect credit histories towards second, third and fourth-tier lenders. There has also been a relative explosion in new private lending over the past couple of years.”
Spring said the figures underline the importance of directors understanding the conditions attached to non-bank facilities and their enforcement mechanics. “Non-bank funding can play an important role in certain situations, but it often comes with higher costs, tighter covenants and faster enforcement triggers,” he pointed out.
“Easy access to non-bank lending and low-doc finance doesn’t remove a director’s responsibility to act prudently. Before taking on more debt, directors need to stop, look in the mirror and be confident the decision won’t compromise the business’s long-term viability.”
He added that directors – and their advisers, including finance brokers – need to consider how quickly financial stress can escalate if trading weakens, and why early professional advice is critical when difficulties emerge.
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