With the end of financial year in sight, now is a good time for businesses to think about trade credit insurance. With budgets for the next year already being drawn up, businesses should include trade credit insurance to protect themselves from the worst case scenario if customers don’t pay.
The importance of trade credit insurance cannot be overstated, given the uncertainty that remains in the market. Insolvencies are on the rise and global economic markets are facing a sustained period of uncertainty.
Last year, insolvencies peaked in the first part of the year. Businesses without insurance are left scratching their heads when a large customer fails. Without recourse, some businesses can fail if just one or two major customers don’t pay. Trade credit insurance gives businesses peace of mind that they are covered if the worst happens. They need to include trade credit insurance in their budget now to ensure they’re covered in the next financial year.
Implementing trade credit insurance while preparing business plans for the new financial year can also significantly help businesses grow. When clients are looking at their business plans to expand into new markets, they can use credit insurance as a way to reduce their level of risk.
The economic shifts affecting Australia, new trade deals and fluctuating interest rates mean the financial year 2017 will be an interesting one for most small businesses.
There are numerous reasons to get credit insurance in order before the end of the financial year. Firstly, healthy cashflow is a sign of a healthy business. If your cashflow is interrupted, it could mean that your staff can’t be paid, new stock can’t be purchased and your business may grind to a halt.
There are a number of things that can affect the cashflow of your businesses. One of the biggest is non-payment or late-payment by customers for the goods and services you provide. Other factors might include market pressures, such as diminished demand, heightened supply or a soft economic climate.
While most of the factors that contribute to cashflow interruptions may be out of a business’s hands, taking on credit insurance means they have a safety net that lets them trade confidently in the face of slow payment.
Credit insurance can also provide a financial buffer zone if a customer is unable or unwilling to pay outstanding invoices. This means that your business can be more flexible with terms of trade and extend the payment period, if needed.
Credit insurance can enhance the value of a business’s debtor portfolio, meaning that trade financiers are more likely to offer increased lines of credit. This can lower the cost of borrowing and broaden the scope of the business.
Offices and equipment are often the first assets businesses insure. However, one of the largest assets on the balance sheet, trade receivables, is commonly left uninsured and vulnerable to risk.
The average business receivables asset makes up about 30 to 40 per cent of the ledger, meaning that without appropriate credit insurance, your business is exposed to significant risks.
A good trade credit insurer will add value to a business by acting as their eyes and ears on the ground, checking that prospective customers’ stability, creditworthiness, and market reputation meets the required standards.
This can give your business more valuable insight than a cursory review may reveal, and help you be better informed to make strategic business decisions.
Mark Hoppe, Managing Director – ANZ, Atradius