The pressure on SMEs is expected to increase during the end-of-year period, highlighting the need for those operators to protect themselves against insolvency.
Every January there is a spike in the number of insolvencies of SMEs. This is due to companies failing to protect themselves against late and non-payment by customers struggling to make sales after Christmas, when consumer demand typically falls.
Christmas can be a difficult time for the SME sector. It’s considered the most profitable period, but if targets aren’t reached it can put them in a very difficult position for the New Year, when business tends to go very quiet.
Suppliers selling to SMEs on credit terms risk not being paid for their goods in a timely fashion, or at all. Unless suppliers have credit insurance to protect themselves from bad debts, regardless of the customer’s reason for non-payment, they can end up going down along with the business.
Experience tells us that when SMEs need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to make losses during the first quarter and, with the first payment of quarterly rent due in January, it can be difficult to survive after a poor Christmas period.
As SMEs approach the busiest time of the year, they should take a moment to think about what trading is going to be like in the lead-up to Christmas, before rushing into increasing stock and staff levels.
For example, with the continuing decline in consumer confidence, will the same levels of stock be required as in previous years? Having too little stock will result in loss of sales, but too much stock will necessitate heavier discounting post-Christmas.
Suppliers to SMEs shouldn’t have to be concerned about having sufficient cash flow over the end-of-year period. Instead, they should get ahead of the curve now so they can avoid going out of business due to bad debt.
The collapses of large businesses such as Dick Smith and Laura Ashley have highlighted how quickly retailers can become insolvent. SMEs are at even greater risk and Christmas is a typical time for this to happen.
When consumers stop spending money, it’s a sign the economy is uncertain. SMEs are vulnerable because it is a cost-intensive undertaking. They must carry stock, maintain premises and pay labour costs, among other overheads, so protecting cash flow is essential.
If, as expected, consumers spend less this Christmas, businesses will feel the effects.
Inventory is often to blame for slow cash flow in SMEs, and they can also face cash flow issues as a result of customers not paying bills on time.
When SMEs pay for inventory up front, then are stuck working with customers who don’t pay on time, they can end up significantly out of pocket. Similarly, if suppliers work with SMEs who don’t pay for their goods or services in a timely fashion, they can end up going down along with the business through bad debts.
Buyers who cannot pay at the agreed time, or are unable to pay at all, can damage an organisation’s cash flow. This can cripple the business and damage relationships with other trading partners.
Credit insurance lets suppliers trade confidently, even when consumer demand falls and SMEs might struggle to meet payments, as it reduces suppliers’ exposure to risk and can significantly decrease uncollectible account expenses.
Having a policy can also help businesses identify at-risk buyers, and focus their energies and sales force on their most valuable customers. Insured companies tend to practise safer trade, with up-to-date information on their trading partners, including whether they are considered at-risk. Consequently, they can make better-informed, strategic trading decisions.
Credit insurance protects companies against risks that could otherwise cripple them. Trade credit insurance can help cover the shortfall from companies that don’t pay at all, or pay late.
Trade credit insurance covers losses that aren’t the customer’s fault but result in non-payment. This can deliver a number of benefits that can help SMEs and their suppliers continue trading confidently. For example, it reduces the business’ exposure to risk and decreases uncollectible account expenses.
Trade credit insurance can also lower the cost of borrowing, letting SMEs widen their scope of business and improve cash flow for peace of mind. It takes away unnecessary worry about customers paying on time and lets the business keep its own payment schedule on track.
It’s possible that tough times are ahead for SMEs and their suppliers. These organisations should get ahead of the curve now so they can avoid going out of business due to bad debt.
Securing their cash flow means SMEs and their suppliers can innovate to stay ahead of the competition and remain viable even as the market tightens.
Mark Hoppe is the managing director, Australia and New Zealand, of Atradius.