Why Construction, Hospitality and Retail Are Your Highest-Risk Portfolios Right Now
Why Construction, Hospitality and Retail Are Your Highest-Risk Portfolios Right Now
If your collections portfolio has exposure to construction, hospitality, or retail (most do) you’re managing risk that looks different right now to almost any other segment in your book.
These three sectors have been under sustained pressure for more than two years. But what’s changed in 2026 is that the pressure is compounding. Legacy debt accumulated during COVID is still sitting on balance sheets. The ATO has resumed full enforcement. The RBA rate environment is squeezing margins that were already thin. And in just eleven weeks, Payday Super arrives, removing the quarterly superannuation buffer that thousands of businesses in these sectors have been using to manage cash flow.
The RBA’s March 2026 Financial Stability Review flags construction, hospitality, and retail as the specific outliers in what is otherwise a relatively stable insolvency picture at the economy-wide level. ASIC data confirms that construction is the single largest contributor to insolvency appointments nationally, with hospitality and food services close behind.
For collections teams, this is a signal about where your exposure is concentrating and whether your strategies are built to handle it.
Key Takeaways
- Construction, hospitality, and retail are the three sectors with the highest insolvency rates in Australia in 2026 and all three are deteriorating further
- Payday Super takes effect on 1 July 2026, eliminating the quarterly super buffer many businesses in these sectors have relied on for cash flow management — Treasury has acknowledged this will likely cause an increase in insolvencies
- Each sector has distinct debt characteristics, cash flow patterns, and debtor behaviours that standard collections strategies aren’t designed for
- The ATO has not softened its enforcement posture. Director Penalty Notices are rising and adding pressure on top of existing commercial obligations
- Collections teams that apply generic consumer strategies to these segments are carrying more risk than their portfolio data currently shows
- Effective segmentation, early engagement, and hardship capability are the three levers that make the most difference
The Payday Super Factor: A Pressure Point That’s Coming Fast
Before getting into each sector, it’s worth understanding why July 2026 represents a meaningful inflection point for collections teams with exposure to small business debt.
From 1 July 2026, Payday Super requires employers to pay superannuation contributions at the same time as wages. Every pay run, within seven business days. Under the current system, businesses pay super quarterly, giving them up to three months of breathing room between obligations. That quarterly buffer disappears overnight.
This matters for collections because a significant number of businesses in construction, hospitality, and retail have been using that quarterly super window as an informal working capital buffer. When cash gets tight mid-quarter, super is the obligation that can flex while everything else gets paid. From July, that flexibility is gone.
Treasury has openly acknowledged that the reform is likely to trigger an increase in insolvencies. Research suggests more than one in five SMEs could struggle with the cash flow impact. And insolvency advisers are already flagging that construction and hospitality, sectors with irregular revenue, large workforces, and thin margins, are most exposed.
For collections teams, this creates a clear window between now and July to assess which commercial debtors in these sectors are already under pressure and likely to deteriorate further when that buffer disappears. The debtors who are managing obligations today by deferring super are carrying a liability that will become visible very quickly.
Construction: The Sector That Never Fully Recovered
Construction has been the largest single contributor to insolvency appointments in Australia for more than two years. In the financial year to March 2025, over 2,600 construction companies became insolvent for the first time, up 23% on the prior year. The 2026 trajectory has not improved.
Why Construction Is Different
The fundamental issue in construction is the legacy of fixed-price contracts signed in 2021 and 2022, when labour and materials costs were lower and inflation was not yet a factor. Those contracts locked businesses into delivering at margins that have since been eroded by cost increases they couldn’t pass on to clients. Many businesses are still working through projects at a loss.
Add to that the subcontractor cascade risk. When a head contractor becomes insolvent, the downstream impact on subbies (electricians, plumbers, concreters, landscapers) can be swift and severe. These are often the commercial debtors already in your portfolio.
ATO enforcement is the third pressure point. Director Penalty Notices in the construction sector have surged, with the ATO pursuing outstanding BAS and PAYG liabilities that were deferred or accumulated during the pandemic. Directors facing personal liability are making increasingly difficult decisions about which obligations to prioritise.
What This Means for Collections
Construction debtors often have complex financial structures, multiple creditors, and a cash flow profile that is project-dependent rather than steady. A business that was current on its obligations last month may be experiencing acute liquidity stress this month because a milestone payment has been delayed or a client has disputed a variation.
Standard contact sequences and escalation timelines are frequently mismatched to this reality. The debtor isn’t avoiding engagement, they’re managing a waterfall of creditor demands with inconsistent cash flow, and the obligation with the most immediate consequence tends to get paid first.
The practical implication: Early engagement is critical. Construction debtors who are contacted proactively before they miss a payment are far more likely to establish a workable arrangement than those who are left to deteriorate through a standard arrears sequence. Waiting for the 30-day mark in a sector with this insolvency profile is a risk.
Hospitality: Thin Margins, High Labour Costs, No Room for Error
Hospitality has been navigating an exceptionally difficult operating environment. Revenue has broadly recovered from the pandemic but costs haven’t followed the same trajectory. Labour costs have risen sharply. Energy costs remain elevated. Rent in most commercial strips has increased. And the consumer discretionary spending environment means customers are making fewer visits and spending less when they do.
Why Hospitality Is Different
Hospitality businesses operate on some of the thinnest margins of any commercial sector. A café or restaurant that generates $1.5 million in annual revenue may have net margins of three to five per cent in a good year. In the current environment, many are running at break-even or below.
The labour cost dynamic is particularly significant for Payday Super. Hospitality employs large numbers of casual and part-time staff, often paid weekly or fortnightly. Under the new regime, super on those wages must be paid within seven business days of each pay run. For a venue that was previously making four super payments a year, the transition to weekly or fortnightly payments represents a fundamental change in how cash has to be managed.
The ATO’s return to normal enforcement after the COVID-era forbearance period has also hit hospitality hard. Many operators accumulated significant tax debts between 2020 and 2022 that are now being actively pursued.
What This Means for Collections
Hospitality debtors tend to be relationship-oriented business owners who will often engage openly if approached correctly, but who are managing an overwhelming number of competing financial demands. The most common failure mode in collecting from hospitality operators isn’t unwillingness to pay, it’s genuine inability to prioritise and a communication style from creditors that makes engagement feel futile.
The practical implication: Communication channel and tone matter more in hospitality than in almost any other commercial segment. Operators who are dealing with an ATO payment plan, a landlord negotiation, a bank facility under review, and a collections call from a lender simultaneously need a clear, specific offer, not a standard demand letter. Self-serve digital payment options and flexible arrangement structures tend to produce significantly better engagement than traditional contact sequences.
Retail: Structural Pressure From Multiple Directions
Retail sits in an unusual position in 2026. Consumer spending data at the macro level doesn’t look catastrophic but the distribution of that spending is increasingly unfavourable for physical retailers. Discretionary retail is under sustained pressure, with consumers prioritising essentials and experiences over goods. Online competition continues to erode the market share of mid-market physical retailers. And cost pressures, particularly commercial rent and energy, are squeezing the margins of operators who can’t easily reduce their fixed cost base.
Why Retail Is Different
Retail debt tends to be more mixed in character than construction or hospitality. You’ll find large operators with sophisticated treasury functions sitting alongside small independent retailers who are managing their finances personally. The approaches required are fundamentally different.
The inventory financing dynamic is also distinctive. Retailers often carry significant debt against stock that is either depreciating in value or struggling to move in the current consumer environment. The asset backing for that debt can deteriorate quickly if trading conditions worsen.
The Payday Super impact in retail is significant because of casual workforce concentration. Major retailers run large casual and part-time workforces, particularly in food and convenience retail. The shift from quarterly to per-payday super creates a structural cash flow tightening for any operator that has been managing the timing gap.
What This Means for Collections
The range in retail means segmentation is critical. A national retailer with 200 stores has fundamentally different financial risk characteristics to an independent homeware store on a suburban high street, and they need to be managed differently.
The practical implication: Retail debtors benefit most from clear escalation logic that differentiates by debtor size, trading status, and the nature of the underlying obligation. Treating all retail debt as equivalent produces inconsistent outcomes and leaves recoverable debt on the table while over-investing in accounts that are beyond practical recovery.
Three Things to Focus On Before July
With Payday Super eleven weeks away and insolvency data continuing to trend in the wrong direction for these three sectors, there are three things worth prioritising now.
1. Segment Your Portfolio by Sector Exposure
If you’re not already tracking sector classification across your commercial book, now is the time to do it. Understanding how much of your exposure sits in construction, hospitality, and retail, and at what stage of delinquency, is the baseline for everything else.
Within those segments, identify which accounts are currently current but show the characteristics of businesses likely to be affected by the July changes: large casual workforces, irregular revenue, visible cash flow pressure, or ATO obligations already in the mix.
2. Move the Early Engagement Trigger Forward
In high-risk sectors right now, waiting for a missed payment before making contact is too late. The most recoverable accounts in construction, hospitality, and retail are the ones where a conversation happens before the debtor is already managing a creditor queue.
Consider a proactive outreach program to commercial debtors in these sectors between now and June, framed as a financial preparedness conversation rather than a collections call. The engagement rates tend to be better, the arrangements more sustainable, and the relationship better preserved.
3. Make Sure Your Hardship Capability Is Ready
The post-July period is likely to produce an increase in hardship requests from commercial debtors in these sectors. The businesses that can’t absorb the Payday Super change will need to engage with their creditors and how those conversations go will determine whether the account is recoverable or not.
Having clear, consistent hardship pathways for commercial debtors, with documented assessment criteria and flexible arrangement structures, is both a compliance expectation and a practical recovery tool. Teams that are improvising these conversations case by case will produce inconsistent outcomes.
The Window Is Short
The data on construction, hospitality, and retail insolvency isn’t new. What’s new is the timeline. Payday Super in July creates a concrete deadline after which the cash flow position of already-stressed businesses in these sectors gets materially worse. The collections teams that act on this before July, through better segmentation, earlier engagement, and stronger hardship capability, will be in a fundamentally different position to those that respond to the deterioration after it happens.
365 Collect is built to support exactly this kind of proactive, segmented approach to portfolio management, with the workflow automation, communication tools, and hardship management capability to handle increased volume without increased manual effort.
If you’d like to talk through what better sector-specific collections capability looks like for your portfolio, we’d love to have that conversation.
Get in touch with our team here.
FAQs
We manage mostly consumer debt. Does this apply to us?
It does, indirectly. The employees of businesses in construction, hospitality, and retail are also consumer debtors. When businesses in these sectors become insolvent or cut headcount, the downstream impact shows up in consumer portfolios quickly, particularly in mortgage arrears, personal loan delinquency, and credit card debt. If you’re seeing early-stage movement in consumer segments that track closely to these industries, that’s worth noting.
What is Payday Super and when does it take effect?
Payday Super is a reform requiring Australian employers to pay superannuation contributions at the same time as wages, rather than quarterly. It takes effect on 1 July 2026. For businesses that have been using the quarterly super window as an informal cash flow buffer (which is particularly common in construction, hospitality, and retail) this represents a significant tightening of their working capital position.
How should we approach commercial debtors in these sectors differently?
The key adjustments are in timing, tone, and flexibility. Earlier engagement before accounts fall into arrears produces better outcomes than standard post-delinquency contact sequences. Communication that acknowledges the specific pressures these businesses face and offers concrete options tends to generate better engagement than generic demand letters. And arrangement structures that flex with irregular cash flow, rather than requiring fixed monthly amounts, are more likely to be sustainable.
Is the insolvency increase in these sectors expected to continue?
Most insolvency advisers and analysts expect the elevated insolvency rate in construction and hospitality to continue through the second half of 2026 and into 2027, particularly given the Payday Super transition. The RBA’s March 2026 Financial Stability Review notes that these sectors remain the specific outliers in an otherwise stabilising insolvency picture. Whether the situation improves materially will depend on rate movements, consumer spending trends, and ATO enforcement posture.
How can 365 Collect help us manage these sector-specific risks?
365 Collect gives collections teams the segmentation capability to identify and manage sector-specific exposure separately, the workflow automation to run proactive outreach programs at scale, and the hardship management tools to handle an increase in financial difficulty requests consistently and compliantly. If you’d like to see how this maps to your specific portfolio, book a demo and we can walk you through it.