Australian small to medium sized businesses are going bust in the highest numbers in seven years1, putting other business (their suppliers) at risk in a collapsing domino effect. Spiralling interest rates and deeper debt levels are significant factors in business failures. For suppliers selling on commercial credit terms, managing accounts receivable and getting the money in to maintain cash flow is paramount to business survival. These cash flow and debtor risks are exactly where trade credit insurance can provide an essential buffer.
Higher interest rates, weaker consumer spending and the end of pandemic relief measures are contributing to cash flow problems for Australian SMEs, but creditor and tax debt are the biggest culprits. The Australian Tax Office has already put its intention to pursue debtors into action in order to collect more than $45 billion owed (considerably more than the 2019 $26.5 billion tax debt)2.
Some lag issues persist in supply chains as well, which is an added burden to business expenses. More than two in five businesses (41%) face supply chain disruptions — a statistic that has remained steady since it peaked in January 2022 at 47%, according to the Australian Bureau of Statistics, and nearly half (46%) are dealing with increases in their operating expenses3.
A further risk to be aware of is the emergence of a new type of insolvency practitioner created during the pandemic that restructures small businesses in trouble. This has made it easier for some directors to walk away from debts and represents a new credit risk to be aware of.
As a result of these and other factors many businesses are deferring payment of accounts to their suppliers and service providers, creating liquidity problems for their business suppliers and limiting their ability to maintain profitability.
If you supply goods to other businesses on trade credit terms — so the cost is billed to them pending payment as an account receivable on your own ledger — trade credit insurance can help protect you financially if a customer business is unable to pay or goes into insolvency. For example, a manufacturer of clothing goods may provide stock to retailers on credit terms and needs insurance for the debtor exposure.
Businesses of all types and sizes need trade credit protection if:
For SMEs, you would need to have a minimum revenue level of $2 million to be eligible for trade credit insurance. Coverage is typically capped at a total of your top two to three credit exposure levels, and a complete spread of risk needs to be provided.
Trade Credit Insurance provides the means for businesses to ride out the impact of delayed payments and debt defaults on their bottom line.
The insurer effectively covers a specific debtor or a range of your debtors that create credit exposures across your customer portfolio. If your customer(s) goes into insolvency or defaults on payments (after a qualifying period) you are able to recoup non-payment losses by claiming on your business's trade credit insurance. The insurer pays the claim and your cash flow is protected.
If you are an exporter, trade credit cover can be adjusted to protect against foreign trade related issues such as contract repudiation, currency inconvertibility or government default.
The benefits that trade credit insurance provides include:
Offering flexibility in payment terms may attract more business customers as well as return customers, giving you a competitive advantage over cash terms only suppliers.
Both direct experience and trade credit insurer assessments can also provide greater insight into your customers' business, building confidence.
Our trade credit specialists have the experience to understand your risk exposures and can advise you accordingly. They also have the relationships with trade credit insurance providers to be able to access the cover best suited to your business needs.
With Gallagher, you will benefit from:
Please contact our team if you'd like to discuss any aspect of Trade Credit Insurance.
1 ATO and creditor action poses greatest risk to SMEs, says Insolvency Australia, Insolvency Australia, 10 August 2023
2 Distressed taxpayers owe the government $45b, Australian Financial Review, 31 October 2022
3 Business indicators, Australian Bureau of Statistics, 23 June 2022
4 Small Business Matters report, Australian Small Business and Family Enterprise Ombudsman, June 2023
Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.
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