Three keys to minimising customer insolvency

Three keys to minimising customer insolvency

When you own a small business, it can be scary to learn that a customer who owes you money has gone bankrupt – but you can minimise this nightmare situation by thinking ahead.

The latest ASIC figures show small and medium size businesses are most at risk as insolvencies continue to rise.

The ASIC overview based on nearly 8,500 administrators’ reports lodged in the year to July 2017 found 63 per cent included evidence of alleged insolvent trading. This was up from 58 per cent two years earlier. Regrettably, as insolvencies rise, there’s a chance your business could be affected by what happens to your customers.

According to Schon Condon, managing principal of insolvency experts Condon Advisory Group, many business owners only think about the issue after the event.  His advice is to take steps before it becomes a possibility.

Condon says it’s important to know your customer and their risks before you start the relationship. “If you are giving credit, you are lending money so you need to find out who you are dealing with. A sale is not a sale until the money is in the bank”, he says.

Know your customers

This first stage of the relationship is also where you ensure your trading terms are in order, along with any legal registrations like on the Personal Property Securities Register, because if things go wrong, your ability to protect yourself can depend on them.

Condon also advises keeping constant tabs on each customer because their circumstances could be very different five or 10 years after they open the account. If you can’t do it yourself, nominate one of your staff or contract specialists to do it for you.

The second stage is when you notice a customer’s payment habits have changed. If they have always been reliable and suddenly they’re not, it’s time to move.

“If your client survives his problem, he survives to pay your bill.”

Find out what’s going on. There’s a potential opportunity for you to help your customer through their difficulties and it makes sense to do that because good customers are hard to find. “If your client survives his problem, he survives to pay your bill. Too many people miss that opportunity,” Condon says.

Stage three is when you discover your customer has gone into liquidation. As soon as you hear your customer has gone bankrupt, make yourself known to the liquidator. If you have any information about what has been going on, pass that on.

Help solve the problem

Condon says it’s always wise to be an active creditor, and help rather than hinder the process. It’s also wise to be ‘commercially practical’.

“If there is no money, or limited funds, demanding massive investigations is pointless. Accept it and move on,” he says.

While acknowledging it’s not always possible, Condon advises trying to avoid having only one or two major customers. If one of them goes belly-up, your business could too.

When alternative medicine giant Pan Pharmaceuticals went into administration in 2003, it owed one of Condon’s clients nearly $1m. The client was left with two options: follow Pan into insolvency and pass that $1m loss onto its own creditors or ask shareholders to raise enough funds to prevent it from going under.

“You put back the cost but accept that you lose the profit,” Condon says. “In the end, the risks associated with going into administration meant the shareholders decided in favour of keeping the company afloat.”

If Condon’s client had trade credit insurance, it could have been business as usual without any of the angst.

“Obviously the solution came about because the shareholders were able to get the money, but many businesses do not have that option and the domino effect is inevitable,” Condon says.

Protect yourself

Situations like that do happen, and that’s where trade credit insurance to help protect your business against non-payment or insolvency is a smart idea. Your Steadfast insurance broker will be only too happy to help arrange appropriate cover for your business.

The Pan Pharmaceutical situation is just one example of how trade credit insurance can give you peace of mind, but there are many others. Say a client needs to go beyond their standard terms on a contract. If they want to run their account up to a higher level than usual, Condon says to quote afresh, including covering the cost of insurance.

“The deal is done, they pay back the money and that’s great. You get what you are due, and the insurance company’s premium is paid. If things go wrong, the insurance company can pursue the debtor – but trade credit insurance helps protect you from the risk,” he says.

Kirk Cheesman, Steadfast broker, confirmed credit insurance is available to all businesses, from SME’s to multi-nationals. Common industries which use trade credit insurance include; building and construction, plumbing and electrical distribution, steel, advertising and media, foodstuffs and beverages, financial risks, exports, grain and agri products, just to name a few. However, any business that sells products or services on credit can be covered via credit insurance.

Cheesman says businesses should ask themselves “what would be the impact on my company if our largest company became insolvent and could not pay us?”. If the answer is “that would be a major problem,” then they should look to reduce that risk to their business.

Important note – the information provided here is general advice only and has been prepared without taking in account your objectives, financial situation or needs. Steadfast Group Ltd (ABN 98 073 659 677, AFSL 254928). Watkins Insurance Brokers Pty Ltd (ABN 23 059 370 455, AFSL 244427)