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Over the course of the Pandemic in Australia, the Government provided support to businesses such as Job Keeper payments and The Australian Tax Office (ATO) paused its debt collection activities to avoid penalising businesses dealing with temporary lockdowns and trading restrictions. Banks provided collateral waivers, extended repayment plans, and provided long grace periods for repayment plans. The strategy worked well, reflected in the low insolvency statistics and reduced trade credit insurance claims. Many companies used this opportunity to revisit their practices and improve their operations, while others continued to accumulate debt and delayed winding up activities – with major consequences for creditors and staff.
In 2021, the ATO announced plans to resume debt collection (a record amount of $55bn as of 30 June 2021) in Victoria, NSW, and the ACT. As a result, we expect to see the prevalence of insolvencies and winding up practices increase over the year ahead. With that in mind, understanding whom you are doing business with is more important than ever. Instead of trading based on trust, access to accurate intelligence is essential in identifying the risks your clients may carry.
Protecting cash flow, guarding against late and/or non-payments from customers, and securing your company’s own creditworthiness is critical to business sustainability. This article looks at two key ways you can limit your liquidity risks: credit reports and trade credit insurance.
Credit reports provide the information you need to know about a business you are considering trading with, from identification details through to financial stability and payment predictors. There are different types of reports, such as comprehensive reports, payment analysis, risk of failure, and risk of late payment; supported by scores based on the company’s financial performance, payment habits, and forecasts.
A Comprehensive Report provides an analysis of a company's long-term operations, credit history, profitability, and stability. The Risk of Failure report tells you the likelihood that a company will experience severe financial distress or failure within the next 12 months. It utilises data and analytics provider illion's Failure Risk Score which looks at over 50 variables including financial statements, company age and structure, court actions, payment history, collections, and defaults to predict future performance.
As a further step in protecting your business’ liquidity, a trade credit insurance policy provides cover on your account receivables. The insurer will analyse your client database, provide you with information/indicators on your buyer portfolio and assist you with credit management. As profit margins become thinner due to higher costs and competition, advice from an insurer with access to a large database and global access to information, trade credit insurance provides a double win, through advice and cover.
Trade credit insurance also increases the insured’s creditworthiness – by decreasing the liquidity risk and transferring the credit rating of the insured to your covered buyer portfolio. A covered buyer will have a limit in place, meaning the insurer will make a claim payment if the buyer is unable to pay. This has the added benefit of a secure cash flow and reduced financing costs. You can learn more about trade credit insurance in Honan’s Trade Credit Capability Statement.
At the start of the Pandemic, the hard market conditions meant most trade credit insurers preferred to remain cautious closing their doors to new business, increasing their premium rates for existing business, and reducing cover on certain sectors and buyers. However, with the relatively low level of claims (likely due to financial support measures outlined above), insurers now have higher risk appetites for both domestic and international markets, and they are more supportive of requests for lower premiums compared to the beginning of the pandemic. Insurers are advising they may need to adjust their new business appetite if the volume of claims increases, meaning this is an ideal time to take out trade credit insurance - while the market remains soft.
To understand how trade credit reports and trade credit insurance can help support your business, please reach out at any time.
Trade Credit Advisor
