Poor payment behaviour and economic and political risks affecting Australia mean the 2018-19 financial year will be challenging for businesses in many sectors.
As the new financial year gets underway, businesses should consider trade credit insurance to protect their cash flow, support growth efforts, and guard against the risk of insolvency, according to Atradius, a global credit insurance provider.
“Healthy cash flow is indicative of a healthy business,” said Mark Hoppe, managing director, ANZ, Atradius.
“However, cash flow can be affected by a number of factors including non-payment or late-payment by customers, and market pressures including weakened demand, surplus of supply, or a soft economic climate. Interruptions to cash flow may result in businesses being unable to pay staff, suppliers or purchase new stock.”
Trade credit insurance covers the losses if businesses don’t receive payment from their customers. This provides a safety net for businesses to trade confidently, especially since many of the factors that affect cash flow are out of an organisation’s control. Knowing these losses are covered provides peace of mind.
Further, trade credit insurance providers can support businesses as they seek growth either through expansion or by targeting new customers. Trade credit insurance providers do due diligence in the marketplace and can help business decision-makers understand the risk level posed by potential customers.
Business owners can then decide whether to do business with those customers and, if so, what terms to offer.
For example, if a business is known for paying its invoices at the last minute, a business may prefer to offer shorter payment terms. This can lessen the risk by making it obvious sooner if a business doesn’t intend to pay.
Alternatively, the business may prefer to demand payment before delivering the goods or services to avoid the risk altogether but this may place them at a competitive disadvantage.
“Whether expanding into new markets or simply trying to grow the existing customer base, businesses can suffer significant losses by extending credit to the wrong customer,” said Mr Hoppe.
“Getting as much information as possible in advance can help mitigate the risk of doing business with unknown entities. Trade credit insurance customers can get this information before putting their business at risk. Putting this in place at the start of the financial year can help set companies up for success.”
Even for organisations that expect to operate as usual this financial year, external factors can result in late or non-payment of invoices, which can heighten the risk of insolvency for businesses without trade credit insurance.
“Businesses that don’t have credit insurance are often left in a vulnerable position when a large customer fails to pay, and the knock-on effect can include insolvency,” said Mr Hoppe.
Trade credit insurance can help prevent insolvency even for businesses whose customers become financially unviable.
“By incorporating credit insurance into budgets and business plans at the start of a new financial year, business leaders can focus on growth without worrying about the risks of not getting paid on time.”