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.

Why Australian business insolvencies are surging in H2 2023

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.

What types of businesses would benefit from trade credit insurance protection?

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:

  • you supply goods or services to customers on a credit basis
  • economic conditions are affecting your industry sector
  • you rely on monthly cash flow to pay operational overheads
  • you need capital to take advantage of opportunities to expand
  • you are considering doing business with a new partner.

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.

How does trade credit insurance work?

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:

  • protecting your business from non-payment of bad debts
  • supporting the risk management strategy of your business
  • protecting your bottom line profits
  • providing an independent assessment of your key debtors
  • helping to improve your credit management procedures
  • giving you the confidence to expand your business.

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.

Why choose Gallagher to obtain trade credit insurance cover for your business?

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:

  • access to the trade credit insurance market through our established relationships with insurers
  • we take a partnership approach to achieving a clear, agreed strategy on managing your trade credit risk
  • part of our service is providing support in managing your credit limit coverage, overdue payments reporting and claims handling
  • through being one of the largest trade credit brokers Gallagher has leverage with potential insurers for obtaining coverage.

Please contact our team if you'd like to discuss any aspect of Trade Credit Insurance.

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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


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