As we approach 2025, many countries face a challenging economic landscape, and businesses are increasingly vulnerable to insolvency. Shifting market dynamics, evolving regulations, and unforeseen global events contribute to the rising number of insolvencies. It’s essential for businesses to understand these risks and take proactive steps to mitigate them. 

Causes of the Increase in Insolvencies 

Many factors can that have contributed to the rise in insolvencies, however, in 2023 and 2024, these trends could have played a bigger part: 

  • Rising Costs and Inflation: Inflation has driven up operational costs, particularly in materials, labor, and utilities. The surge in energy prices due to geopolitical tensions has further strained businesses, especially SMEs. 
  • Increased Borrowing Costs: Higher interest rates have made borrowing more expensive, particularly for businesses relying on debt. Many are now struggling with COVID-related loans, worsening liquidity issues. 
  • Reduced Access to Funding: Technology companies are struggling to raise funding to further develop and fuel their growth due to a lack of appetite from VC’s and private equity. 
  • Weak Consumer Demand: Inflation has reduced disposable income, weakening demand for goods and services, especially in discretionary sectors. Businesses also face challenges adapting to changes in consumer behavior post-pandemic. 
  • Supply Chain Disruptions: Global disruptions, exacerbated by Brexit (for the UK) and geopolitical tensions, have led to production delays and increased costs, putting pressure on businesses to maintain operations. 
  • Labor Shortages and Wage Pressures: Shortages in sectors like healthcare and hospitality have pushed wages higher, increasing costs for businesses already under financial strain. 
  • Overleveraging and Poor Financial Management: Excessive debt and poor cash flow management have left many businesses unable to service their debt, pushing them towards insolvency. 
  • Post-Pandemic Challenges: As government support measures ended, businesses struggled to repay pandemic-related loans, worsening their financial situation. 
  • Regulatory and Tax Changes: New regulations and tax hikes, such as those related to ESG compliance, have added to financial burdens, reducing businesses’ ability to reinvest or service debt. 

Business Insolvency 

  • Australia: has seen a steady increase in business insolvencies in financial year 2024, a sharp 39% rise in solvency from financial year 2023 (ASIC). Australian startups raised $3.5 billion, a 54% drop from the previous year. Rising interest rates and a shift in investor preferences have added to financial strain. 
  • United States:  business insolvency rates have dropped significantly in recent years, with filings reaching their lowest levels in over a decade. According to data from the American Bankruptcy Institute (ABI), business bankruptcies fell by 27% in 2023 compared to the previous year, with 16,500 filings recorded, down from 22,600 in 2022. This decline follows a similar trend observed in 2022, where filings decreased by 22% from 2021. 
  • United Kingdom: Company insolvencies in 2023 and in 2024 to September were at levels last seen during the 2008-09 recession. This increase was attributed to the post-pandemic economic environment, including high energy costs, inflation, and rising interest rates. 

Projections for 2025 

Looking ahead to 2025, experts predict that insolvency rates will continue to rise due to persistent economic uncertainty, regulatory changes, lack of funding, and the lingering impact of the global pandemic. This environment will require businesses to stay proactive in their financial planning and risk management strategies. 

Outsourcing Risks and Insolvency 

Businesses that outsource to third-party vendors are at risk if those vendors become insolvent. The potential repercussions include: 

  • Operational Disruptions: Insolvent vendors may struggle to pay for software licenses or maintenance, leading to service suspensions and operational interruptions. 
  • Data Loss or Inaccessibility: Insolvent vendors may lose access to critical data, disrupting business continuity and customer service. 
  • Reputational Damage: Should the third-party application be an external customer facing solution, disruptions may cause challenges with customers who are expecting a certain service level  
  • Loss of Revenue: Should the third-party application be a revenue generator for the company, downtime due to supplier failure may lead to loss of sales  
  • Outdated Systems: Financial difficulties may prevent vendors from upgrading software, leaving businesses reliant on outdated, inefficient systems. 
  • Vendor Relationships and Legal Disputes: As vendor insolvencies unfold, strained relationships and contractual issues may arise. 

To mitigate these risks, businesses should manage their vendor relationships carefully, ensuring they have contingency plans in place for potential insolvency scenarios. 

Mitigating Risk in 2025: The Role of Software Escrow 

A crucial strategy for reducing risk is the use of software escrow services. A software escrow agreement is a contract between a vendor, licensee, and a neutral third-party software escrow agent, ensuring that a business has access to the source code and related materials in case of the software vendor’s insolvency. 

With a software escrow agreement in place, in the event of software vendor insolvency, businesses may continue to use and maintain critical software applications, minimising disruptions. For software vendors, software escrow agreements provide assurance to clients that their investment is protected. 

As the risk of insolvency grows, incorporating software escrow into contracts is an increasingly important strategy. It’s a proactive measure to safeguard operations, especially as businesses face heightened financial uncertainties. 

Conclusion 

The rise in business insolvencies requires companies to be vigilant and proactive in their supplier management and risk mitigation strategies. By understanding the causes of insolvencies, preparing for future projections, and implementing practical and tested processes like software escrow, businesses can strengthen their resilience and reduce the impact of supplier failures. As we move closer to 2025, staying informed, adapting to market changes, and prioritising effective risk management will be key to long-term success. 

To see how software escrow services can be beneficial to businesses, check out this case study.