The rate of business closures in Australia has reached a four-year high, with higher cost of living pressures facing households contributing to more companies shutting up shop.

Data released by debt-monitoring firm CreditorWatch showed the failure rate of businesses rose to 5.04 per cent in October — the highest since the peak of the COVID-19 pandemic in October 2020, when the failure rate reached 5.08 per cent.

On an annual basis, insolvency rates were roughly 25 per cent higher than they were prior to the pandemic.

The agency identified three main reasons for insolvency that failed businesses had in common: the higher cost of living, the higher cost of doing business, and the Australian Taxation Office's efforts to recover $35 billion owed in tax debts.

"When you talk about the cost of doing business, a lot of smaller businesses face the same sort of pressure that consumers do with electricity prices, insurance, rentals, [and] minimum wage increases, so they've also seen their costs of doing business go up a lot," Ivan Colhoun, CreditorWatch's chief economist, said.

"Together with some greater caution in discretionary spending and softness in interest-rate-sensitive sectors of the economy, this unsurprisingly has led to higher voluntary business closures and some rise in insolvencies."

That caution has been acutely felt in the hospitality sector, which saw the greatest number of business insolvencies in the year to October, with an average failure rate of 8.5 per cent.

CreditorWatch predicted the sector's failure rate would rise in the coming 12 months to reach 9.1 per cent.

Construction had the second-highest business failure rate, with a 12-month average of 5.3 per cent, however CreditorWatch's data showed it appeared to be "levelling out".

"On the construction side, interest rates do reduce construction, and there's the well-publicised cost pressure that businesses in the building industry have faced for a number of years now," Mr Colhoun said.

Both hospitality and construction had the most number of businesses with debts to the tax office, and had the greatest tax default rate, which further constrained their financial viability.

Business-to-business payment defaults had continued to trend higher, the report noted, while arrears in general had risen across most sectors — indicating more businesses were struggling to pay their bills, even to their suppliers.

Mr Colhoun said the rising arrears were "not surprising" given the higher cost of doing business and higher interest rate environment.

"Unfortunately, one of the consequences of that is that we do see arrears go up and we do see some businesses fail," he said.

The Reserve Bank of Australia is not expected to cut interest rates at its final meeting of the year, to be held on December 9 and 10.

The central bank has kept interest rates at 4.35 per cent since last November, with most economists now expecting the first cut to be delivered in the first half of 2025.

Even though the annual rate of inflation fell to 2.8 per cent in the September quarter, unemployment remained steady at 4.1 per cent in October — despite the higher level of business closures recorded by CreditorWatch.

"It does depend a little bit on whether we're seeing bigger businesses fail or smaller businesses fail, and it also depends on whether there's still reasonable demand for labour," Mr Colhoun said.

"I don't think there's many large businesses failing, and I still think there's quite reasonable demand for labour … there are still jobs out there.

"The RBA has been very clear: either inflation has to come down or unemployment has to go up … so until we see that change, interest rates aren't going to come down."

However, he warned that lower inflation would not reduce prices. But he said it would relieve cost of living pressures for households and encourage spending at businesses.

"It depends on the particular business, and obviously interest rate cuts take some time to have an effect," Mr Colhoun said.

"The thing I'm watching at the moment is the July tax cuts, and there's some evidence that they're flowing through to the economy a bit better.

"At present, we've seen consumer confidence go up in the last couple of months, business confidence also rose, and maybe even retail sales picked up a little bit … that's helpful in the near term."

But that confidence would not necessarily translate into fewer businesses closing, he warned, pointing to potential uncertainty overseas in the coming months.

"There's a lot of new uncertainty thrown into the economic outlook by the change of administration in the US, which is proposing some very significant tariff increases on our major trading partners," Mr Colhoun said.

"So there's additional uncertainties for businesses to deal with going forward."