The big problem facing small business

Dr Amanda Bull, QUT School of Law and QUT Centre for Justice

Small businesses are often described as the backbone of the Australian economy, and in recent years Australia has taken important steps to recognise their distinct needs within the insolvency framework. The introduction of the small business restructuring regime in 2021 marked a significant shift away from one-size-fits-all insolvency laws, acknowledging that small enterprises require faster, cheaper and more accessible pathways to restructure and survive financial distress.

That reform was a major step in the right direction, but it stopped short of addressing the personal risk that defines small business failure. Experience since its introduction, and my research into how the regime operates in practice, shows this is of particular concern where small business directors have provided personal guarantees to support SME loans. In the small business context, corporate failure rarely exists in isolation: personal and business finances are commonly intertwined, and insolvency systems that continue to treat them as separate risk undermining genuine rescue outcomes.

Unlike large corporations, small businesses are deeply personal ventures. Owners commonly use personal savings to fund operations, draw on family homes as security, and give personal guarantees to keep their businesses afloat. When financial distress arises, the consequences do not stop at the company. They flow directly to the individual, their family, and their future earning capacity.

Australia’s insolvency system, however, remains structurally fragmented. Corporate insolvency processes, including small business restructuring, focus on the company, while personal insolvency law deals separately with the individual. For many small business owners, successfully restructuring the company offers limited relief if personal guarantees remain enforceable and personal insolvency looms regardless.

This disconnect undermines the very objective of the small business restructuring regime. If directors know that restructuring the company will not meaningfully address their overall financial position, they are less likely to engage with the process early. Instead, many delay seeking help until collapse becomes unavoidable. This is a pattern that increases loses for creditors and deepens the personal, financial and psychological toll on business owners.

The issue is not unique to Australia. It featured prominently in recent international insolvency reform discussions I contributed to at the World Bank in Washington DC and at UNCITRAL Working Group V in New York, where policymakers and experts from around the world examined how insolvency systems can better support small businesses. A recurring theme across jurisdictions was the same challenge Australia faces: how to design rescue frameworks that reflect the lived reality of small business, rather than the structure of large corporations.

Internationally, there is growing recognition that effective small business rescue requires better integration between corporate and personal insolvency frameworks. Where systems remain siloed, business owners perceive insolvency as punitive and final, rather than as a mechanism for rehabilitation. This perception discourages early engagement and reduces the likelihood of successful restructuring. This matters because insolvency law today serves a broader function than simply managing failure. It plays a central role in economic resilience, productivity policy and increasingly, mental health outcomes. In sectors such as residential construction, where margins are thin, payment delays are common and personal exposure is high, the consequences of financial distress can be devastating. Research consistently shows that insolvency and financial pressure are linked to significant psychological harm among small business owners.

Australia’s small business restructuring regime was introduced with the right intent, and it has created opportunities that did not previously exist. But intent alone is not enough. If restructuring frameworks do not deal with the personal exposure that defines small business risk, particularly the prevalence of personal guarantees, they will continue to fall short of their rescue potential.

Addressing this challenge does not require abandoning Australia’s existing reforms. Rather, it requires building on them. That may involve better coordination between corporate and personal insolvency processes, improved treatment of personal guarantees in restructuring scenarios, or earlier intervention mechanisms that encourage distressed businesses to seek help before personal liability becomes overwhelming.

If we want small businesses to thrive, and if we genuinely value their role in the Australian economy, our insolvency laws must reflect how small businesses actually operate. Failure in this space is rarely the result of recklessness or poor character. More often, it reflects structural vulnerabilities and systemic risk.

Small businesses do not fail alone, and until our laws fully recognise that reality, too many viable enterprises, and the people behind them, will continue to fall through the cracks.