Mitigating Risk with Trade Credit Insurance
Insolvencies in the Australian construction industry jumped almost 40 percent in the 3 months to December 2021 when compared to the September period, with construction making up about a quarter of insolvencies across Australia.
Businesses in the industry are struggling with not only a stretch in supply chains and labour, but also the increase in the cost of materials and wages.
In this blog we explore why businesses are struggling and how to mitigate risk of insolvency with trade credit insurance.
Causes of Insolvency in Construction
There are a number of reasons construction businesses are struggling, with insolvency numbers increasing. These include (but are not limited to):
- Failure to secure finance/funding leaving tradies and subcontractors short.
- Some contractors being asked to lock in prices for uncontrollable risks like material price jumps.
- The obvious risks from the pandemic, such as lockdowns and reduced capacity of workers, which has forced some construction projects to be pushed back.
- Unable to find skilled labour.
- Many builders being victims of the “race to the bottom” when tendering for a project.
- Increase in the cost of supplies/materials (Some estimate that this year alone; timber has risen 50% to 100%, Steel by 30% to 60% and concrete by 20% to 40% not to mention the tight labour market and cost of trades).
How to mitigate risk and protect your business
If your business supplies goods or services on a credit basis you’re open to the risk of the buyer not paying, which means you’re probably already familiar with bad debts.
These bad debts can be detrimental by:
- Disrupting your cash flow;
- Weakening your balance sheet; and
- It can ultimately take management time away from your business
At Ledge, we receive a number of concerns from business owners around the issues of non-payment and the impact this can and will have on their cash flow and balance sheet. Most of these businesses recognise the risk, however some still deem trade credit insurance to be “too expensive”, complicated and unnecessary.
The irony is that while most businesses wouldn’t sleep at night if they didn’t have insurance cover in place to cover property damage, workers compensation, general insurance etc, the probability of incurring a large or multiple bad debts can be just as high if not higher in certain economic environments.
If you run a SME and one of your largest clients fails to pay, having credit insurance could be the difference between your business surviving or becoming insolvent. For example, if you are a subcontractor, whilst you may be very comfortable with the party/company you are contracting to, you won’t necessarily know the status of other parties who are directly or indirectly involved in the contract. It is the unforeseeable risks which often blindside us and whilst we can’t control or prevent them, we can insure against them.
So, how does Trade Credit Insurance work?
It’s a policy that’s designed to act as a safety net against unexpected losses and it may also help you avoid losses altogether. The policy can be structured in a way that is tailored to the demands of your business and the sectors in which you operate. Depending on what type of cover you have, the policy can protect up to 90% of the insured balance owing (minus your deductible) to ensure that your business can continue to operate with minimal disruption.
Benefits of Trade Credit Insurance
- Protects your receivables against bad debts
- Preserves your liquidity
- Allows you to have the confidence to expand your business
- Improves your business’s credit management
- Add security – trade credit insurance is recognised by banks, and shareholders are also reassured that their assets are protected
How do you know if Trade Credit Insurance is right for you?
If you’re a business owner who:
- Has customers that are taking longer to pay invoices;
- Is worried about clients not paying, or;
- You’re looking to expand into new markets and take on new clients.
Trade credit insurance is suitable for you and your business.
Trade Credit Insurance Case Study
- Construction company with $5 million turnover
- The trade credit insurance facility cover costs $12k plus tax per year
- The client incurred a bad debt of $150k which would have put a strain on the business’s cash flow
- Insurance covered 90% (less deductibles)
- Trade credit insurance protected the company’s cash flow and gave them confidence to continue to trade through a difficult economic climate. In the end, $12k was worth it as it saved the business $135k (less deductibles).
Is trade credit insurance right for your business?
Although credit insurance may seem expensive it can save businesses in unforeseen circumstances which is why it’s applicable for all sized businesses and market sectors.
To find out more on the many facilities available contact your Ledge Finance Executive today or simply click here to contact us.
Please note the information provided here is general in nature and does not constitute financial, tax or other professional advice. You should consider whether the information is appropriate for your needs and seek professional advice prior to making any decisions.