Companies offering credit to customers expand their market substantially. The time afforded to customers, through credit management, to pay for goods and services has benefits for both parties. The vendor often benefits from increased purchasing and more regularity of orders placed. The customer benefits from expanded credit terms and increased cash flow. In some nations, it is customary for regular vendors and customers to exchange credit memos, as they are more cost effective, simplify exchanging currency and circumvent tax deductibles and liabilities.
The downside is found in the credit risks associated with these practices. If non-payment occurs, the vendor is left absorbing bad debts and working with collection services seeking remuneration. Credit risk is mainly shouldered by the vendor but there are ways to mitigate this risk. The simplest risk management strategies are internal and include good research, consulting credit ratings and building a strong relationship with customers. Yet, even the best strategy will fall short in time.
Credit insurance (CI) and trade credit insurance (TCI) are often used interchangeably. Where TCI focuses on international credit, CI is more domestically optimized. The challenges in doing business outside of Australia are complex and seeking legal remedy is often infeasible. TCI offers protection for a wide variety of situations and can be tailored to your specific needs. It can include political risk, import/export risk and others. In addition to foreign trade, domestic customers are equally capable of not paying their debts. Our credit insurance is tailor made for your customer portfolio as levels of coverage, premiums and benefits can be adjusted to your comfort level.
Why Should You Care?
Do you offer credit to your customers beyond the standard payment terms? Perhaps you have a regular customer with several million dollars in payables owed to your company. It’s more common than many would realize but what happens when that customer is unable to pay? The answer largely depends on whether or not you’re insured.
Even though the benefits for securing policies have been described and are well known, many companies choose to remain uninsured. Accounts receivable, for the majority of companies, represents 40% of their total value. A study from 2016 found that Australian businesses are the worst at paying bills on time. The study concluded that 72.5% of invoices are paid late. They also found that;
- 19 billion is tied up beyond the customary 30-day payment period and considered late.
- 90% of small business failures are caused by poor cash flow.
- The average bill is paid 23 days late, if at all.
- 62% of businesses who failed due to poor cash flow attributed their failure to one customer.
- 1 in 10 invoices are never paid.
These observations are in line with other statistics that show small and medium sized (<150 employees) businesses are vastly underrepresented in the Australian credit insurance markets. The perceived complexity and cost for policies has been a major barrier for small business participation. Unfortunately, it is more often the small business that is more at risk from defaults, non-payments, rejections and political factors. Larger well-established corporations might be better suited to absorb the loss but are still missing out on the opportunity to protect themselves from bad debts if left uninsured.
Automation and the digital nature of emerging services offered by private insurers are expected to drive growth in the coming years, especially for small business participation. The variety of foreign and domestic trades that occur has created a responsive industry that can tailor policies to suit most any requirements, large or small.
At Niche Trade Credit (NTC) we understand the value in making relationships with our clients. We encourage large and small businesses to seek us out and insure their trade credit. Our experts can more clearly define the types of coverage offered, levels of coverage and how these issues apply to your unique situation. Don’t fall victim to poor cash flow as 90% of small business have in the past. For a fraction of the cost of one delinquent invoice, you could be covered too.
*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.