I’ll share with you a recent case I encountered. We were working with a potential client, analysing their credit risks and evaluating some of the best measures to mitigate these. Of their exposures, there was a company called Kamb Investments Pty Ltd and the potential client needed a $700,000 limit on this customer.
Fast forward 4 months and Kamb investments Pty Ltd have called in the administrators, leaving this particular business with a potential loss of over $500,000. Based on a 5% profit margin, they will now need to sell $10,000,000 worth of goods to recoup this loss.
So, how can you avoid this situation and join the ‘I hate bad debts club’?
To help reduce the risk associated with trading on credit terms, they could have:
- Completed a credit check on the company and directors prior to trading
- Made sure they had appropriate terms and conditions agreed to
- Registered any security interests on the PPSR
- Monitored their clients to receive alerts on any adverse changes
- Ultimately taken out a trade credit insurance policy to recover their losses
The ultimate protection against a bad debt is a trade credit insurance policy, besides being able to claim on lost money, you can:
Preserve Your Profit
On average about 40% of a company’s assets are from the debtors ledger, a significant part of your business that should be protected. A bad debt reserve is not the answer. It won’t put cash back in your hands.
Protect your liquidity and cash-flow
Apart from the long-term loss of a customer and future revenue streams, there is the immediate effect on cash flow, which could even lead to your own business failing. The proceeds of a credit insurance claim injects liquid funds back into your business. We can arrange a virtually unlimited cash reserve for the balance sheet at a planned deductible cost.
Confidence to expand
You can grow your business in confidence knowing that the cost of potential customer failures is already covered. You can also be more aggressive in your sales and marketing by extending higher and longer credit terms with your customers.
Strengthen your credit management
Whether you trade with customers domestically or internationally, your customer’s status can be affected by internal and external factors, unknown to you. No matter what credit control procedures you have in place, you can further enhance the quality of decisions made on credit limits by working closely with us and gaining access to our extensive knowledge database. You can spend less time worrying about venturing into new markets or territories and be ‘in the know’ about the customers you are dealing with.
Protect your debtor’s ledger and gain access to more efficient financing. Banks recognise trade credit insurance as collateral security when providing financing for local or overseas sales. Your shareholders can also appreciate that their assets are being well protected and that financial corporate obligations are being met.
And here’s why I hate bad debts. SME’s now have to recoup these costs which in turn could have been used for product development, marketing, new stock or simply just to grow the business. Protection against these types of debts are as much about minimising the risk as they are about protecting a business’s future growth and its profitability.
There are many ways your business can make small changes today that can have a big impact tomorrow.
Kirk Cheesman | Managing Director of National Credit Insurance Brokers