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Business defaults rise, insolvencies may follow

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Business defaults rise, insolvencies may follow

NCI Trade Credit Solutions

Non-payment of business invoices soared last year, with trade credit insurance payouts surging by 19 per cent in 2018, one insurer has revealed, as businesses are urged to act promptly when payments are overdue.

The latest NCI Trade Credit Index, produced by insurance brokerage NCI Trade Credit Solutions, found that the value of its credit insurance payouts last year was $64 million, up by 19 per cent on that paid out in 2017.

A breakdown of the top 10 industries for claims lodged is listed below.

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Most of the growth in claims being made came in the December quarter, which were a hefty 41 per cent above their level in the same quarter of 2017.

It coincided with a 4 per cent rise in the index score, signalling riskier business conditions. The score of 798 on the index for the December quarter was also the highest recorded for three years.

The average payout was $97,000, while the largest claim lodged for the year was for $5.1 million.

NSW (32 per cent) and Queensland (26 per cent) accounted for the bulk of the claims lodged. They were followed by WA (18 per cent), Victoria (14 per cent), South Australia (8 per cent), and the Northern Territory and the ACT (1 per cent each).

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A spokesperson for NCI confirmed that Tasmania had zero claims lodged in the final quarter of 2017, but added that the volume of claims in the island state is always relatively low.

Meanwhile, the brokerage also recorded a 15 per cent rise in the volume of debt collection requests received, to 2,977.

Managing director Kirk Cheesman warned that the increase in collection activity and insurance claims typically results in “increased insolvency within six to 12 months”.

“In addition to the higher levels of bad debt and overdue accounts that we recorded last year, the first quarter of the year is traditionally the peak period for insolvencies, so we’ll be watching the January to March period closely,” he said.

However, Mr Cheesman suggested that the increasing volume of insurance claims and debt collection activity is a sign that business leaders are taking a more proactive approach in chasing late and non-payments.

“When it comes to overdue debts, we’re finding that businesses are increasingly willing to take early collection action against their customers and suppliers. And if they’re still not paid promptly, they’re increasingly instigating legal action,” he said.

“It shows that businesses are losing patience with slow payers, which is likely the result of their own cash flow struggles to meet their own debts.”

ASIC revealed that that vast majority of companies that failed last financial year had assets of just $100,000 or less, and revealed the primary reasons for collapse identified by the 7,613 reports lodged by external administrators.

Top 10 industries for trade credit insurance claims (Q4, 2018)

  1. Employment agencies ($7.75 million)
  2. Labour hire ($6.18 million)
  3. Building/hardware ($5.34 million)
  4. Electrical ($4.67 million)
  5. Food/provisions ($2.13 million)
  6. Steel ($2.04 million)
  7. Manufacturing ($1.27 million)
  8. Plumbing ($1.05 million)
  9. Finance ($1.05 million)
  10. Equipment hire ($975,220)

Source: NCI Trade Credit Risk Index

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