While most employees are looking forward to the holidays, it’s likely many small business owners will be less enthusiastic, as slow payments and poor trading conditions are rife over the festive period.
A Xero report released earlier this year valued the economic impact of late payments to SMEs at an eye-watering $115 billion annually – but Patrick Coghlan (pictured above), CEO of CreditorWatch, says the problem becomes particularly pronounced in the summer months.
According to Coghlan, there’s typically a rise in the number of insolvencies at the start of the year, as businesses struggle to come back from missed bills and bad debts.
“The fact is, most organisations don’t have people working over the end of December and the beginning of January, or they have skeleton staff on, so you find the critical things like accounts payable and accounts receivable just aren’t being done,” he said.
“What we also see is, there are companies which have been battling all year to make it to Christmas, because that’s a big time for them and that’s when they make the most money – so retail, hospitality, restaurants, that sort of thing – but if they have an average month, they’ll just decide to cut their losses and close the business down.”
The wave of businesses closing their doors then has a knock-on effect on suppliers, particularly those who’ve let unpaid invoices stack up.
“We see a huge uptick in insolvencies, bad debt, and court action, typically in February and March, because people simply haven’t been paid through the Christmas, New Year, and early January period,” said Coghlan.
Mark Hoppe, MD of trade credit insurer Atradius, agreed the risk of insolvency is a major one for many SMEs – yet it often goes overlooked by both organisations and their insurance brokers.
“SMEs rely very heavily on one or two key customers and that is a big risk,” said Hoppe. “Brokers will go through the largest risks for an SME but don’t always discuss concentration risk when, quite often, non-payment by their biggest customer is the single largest risk they would have.”
It’s a problem which Hoppe says is exasperated by several factors – including the tendency of many businessowners to be overly trusting of long-held relationships.
“They think that because they’ve been dealing with someone for years, or because that person helped them when they got started, that nothing is going to go wrong,” Hoppe told Insurance Business.
“Then when something does go wrong, and we see it happen all the time, they never expected it and don’t have a plan in place.”
According to the Xero report, over half (53%) of all trade credit invoices to SMEs are paid late but if they were paid on time, it would be worth $7 billion in working capital for SMEs. This $7 billion could then be leveraged to reduce debt or increase investment and output.
“Unlocking this capital for small business to use will give a significant stimulus to the economy,” said Xero MD Trend Innes. “Faster, predictable payments will generate greater stability and confidence among the small business sector. Small businesses will grow faster, have better cashflow, employ more people and take on more business risk.”
An effective way for SMEs to avoid bad debt is by using credit checks on their customers – but Coghlan says Australia is still behind other parts of the world when it comes to this approach.
“If you go to the US or Europe, people are aware of the fact that you can run credit reports on your debtors and on your customers, but many SMEs in Australia just don’t know they can do that,” he said.
It’s an issue that Coghlan encouraged brokers to bring up with their clients, as a better understanding of credit worthiness, or performing a data wash, could help SMEs limit their exposure to an unnecessary risk.
“A data wash is essentially a cleanse of your customer data base, and that will identify their trustworthy customers, but more importantly, it’ll identify their high-risk customers,” he said.
“Those are businesses which have got adverse information against their credit file – things like court actions, payment defaults, insolvency notices, cancelled ABNs – some really basic things but also some really detrimental things that most companies wouldn’t be aware exists in their customer base.”
Software platforms can also help SMEs identify which businesses are paying them slowly, despite being prompt with their other suppliers.
“When you allow someone to get away with always paying late so to speak, it’s really difficult to pull them back into line but there are tools which can actually show you, within your ledger, which customers are paying you really slowly but are paying everyone else really quickly,” said Coghlan.
“They’re essentially using you as an interest-free loan and they’re taking advantage of either your timidness or your goodwill.”
Trade credit insurance, too, can protect businesses when customers fail to pay, and the right policy will also help SMEs determine which organisations are safe to deal with.
“Trade credit insurance providers can perform due diligence on prospective customers so business owners can determine whether to offer them attractive payment terms or require cash-on-delivery arrangements,” said Hoppe.
While many SMEs are reluctant to consider the possibility of being left in the lurch by a trusted business connection, Hoppe says brokers can reframe the conversation as a way of helping organisations grow.
“A lot of our strategy when we talk with SMEs is to discuss how they get to the next level without taking on too much risk,” he said. “If they see credit insurance as a way to help them grow, more as an investment rather than an expense, then that’s the biggest mental hurdle to get over.”
Coghlan also suggested that exploring the possibility with clients could help brokers elevate themselves from an insurance salesperson to a trusted business advisor.
“If you can help educate your own client, they’re going to be in a better financial position, they’re more likely to grow, and therefore their premiums probably go up – but you’ve also got the goodwill of showing you’re actually interested in the success of their business, and aren’t just trying to sell them an insurance policy,” he said.
“If you look at insurance, you look at accounting, all of these professional services, you’re not just selling a single product anymore, you have to be an advisor – obviously within legislation – but those who do that are going to be a lot more successful.”
