This month’s collapse of Probuild has sent the construction industry reeling. With 800 workers owed $14 million and other creditors potentially owed much more, industry experts predict this will send many sub-contractors and suppliers out of business. The demise of Probuild is a timely reminder that regardless of how well you know your contractors, all subcontractors are vulnerable, and it is risky to believe that it ‘won’t happen to you’. Now more than ever, trade credit Insurance is a must have for subcontractors.
Material price rises and supply chain delays are both proving to be extremely difficult challenges for builders and the risks don’t stop there. As the price of materials soar, projects are delayed, and shortages of materials have become an ongoing issue. Many businesses aren’t making profits, despite the oversupply of work. Add to this the pressure on wage increases and it is certainly a dangerous combination for builders already operating on tight margins.
Corporate insolvency appointments in Australia have remained well below long-term averages through 2020 and 2021, largely due to the government stimulus measures and insolvency protections but that is now changing. As the Government begins winding back COVID-19 insolvency protections and stimulus measures, there is a risk this could prompt a rash of insolvencies and subsequent redundancies, a destabilising force on the local economy. Adding further fuel to the fire is the ATO’s ramped up enforcement and collection activities adding further pressure on businesses and putting those at the bottom of the money chain at substantial risk.
What is trade credit insurance?
Trade credit insurance (also known as debtors’ insurance) protects businesses from bad debts. It insures accounts receivable and protects businesses from unpaid invoices caused by customer insolvency and protracted default. For most businesses, the value of the debtor’s ledger (the money you are owed) is one of the largest assets and yet it is often not insured.
Why insure your debtors?
You insure your car and your house so more than anything else, it makes perfect sense to insure your business. After all, it is your livelihood that pays for all your other insured assets.
How does trade credit insurance work?
Trade credit insurance works by insuring you against your buyer failing to pay, so every invoice with that customer is insurable for the insurance year. A typical policy includes an excess as low as $5,000 (with some SME products offering a reduced excess of $2,500) and 90% coverage. If you have to claim on the policy due to a customer’s failure to pay, the excess is deducted and 90% indemnity applies. E.g. $100,000 ‘net bad debt’, minus $5,000 = $95,000 x 90% indemnity = claim payment of $85,500.
Who is our trade credit partner?
We work closely with Prasidium Credit Insurance, utilising their expertise to get the best outcome for our clients.
Trade Credit Insurance is heavily used in the Building and Construction industry by businesses of all sizes with minimum annual turnover usually starting around $750,000 upwards.
Key benefits of Trade Credit Insurance
- Swift access to replacement capital
In the event of insolvency of non-payment of a customer, credit insurance provides you with swift access to replacement capital, protecting your cash flow, before permanent damage is done to your business.
- Protect hard earned profits
A $100,000 loss on 10% profit margin is $1,000,000 in lost sales. How would your business cope if one or two of your major customers fell over? Give yourself piece of mind knowing all your hard work is protected and you cannot be affected from a bad debt by transferring the risk of non-payment to an insurer.
- Increase sales to existing and new clients
A trade credit insurance policy can provide you with support and confidence to extend larger credit limits, more favourable trading terms and alleviate buyer concentration risk issues and gain a competitive advantage in the market.
- Improve credit management
Obtain greater access to information on your customers having an insurer assess the credit risk before you commence work for a builder.
A credit insurance policy will provide you with far greater access to information than you would otherwise be able to obtain.
- Improve access to finance
Is your sales volume creating working capital restraint? Struggling with cashflow difficulties? Trade credit insurance can support and strengthen access to credit facilities from financial institutions who can be named on the policy as a loss payee. A policy may help reduce financing costs.
- Strengthen balance sheet
Replace your bad debt provision with a trade credit insurance policy to improve the balance sheet and inject those funds back into the business as working capital. Funds are placed back into the business through a claim payment, rather than taking out unrecoverable money from a bad debt provision.
There are many ways to protect one’s business. Trade Credit never seems to be the first discussion point when speaking to your general insurance broker. With our assistance and that of our partners Prasidium Credit Insurance now is the time to expand on this conversation.