Nipping things in the bud
An businesses first line of defence starts before any goods are sold or services rendered. This can be achieved by assessing the creditworthiness and payment record of prospective clients – allowing businesses to decide who they will grant credit to and how much will be allowed.
“Your terms of trade are also vital as they set out the rules of engagement and ensure clients know when they should be paying and what happens if they don’t pay on time,” says Chapman.
“Once the account is operational, your credit procedures should dictate what actions you will take if your terms aren’t adhered to. By monitoring your client payment information you can identify late payments and act quickly to chase outstanding debts and put delinquent accounts on hold.”
Ultimately, the money is much better in your account than it is in your client’s.
Letting a late payment slide in excess of 30 days, means the business waiting is paying interest on overdrafts. At a base level, the cash is not there to invest in the business so new stock can’t be bought and their own outgoings can’t be paid.
“Clients expect to be paid on time, you expect to be paid on time and it’s vital to manage both aspects,” says Chapman.
“The longer an amount remains unpaid, the higher the probability it will turn into a bad debt and that is really damaging to your business.”
Businesses often have individuals wearing multiple hats – the credit controller might also be the accountant or director. Thus, time is not at a premium for company staff to chase external companies for late payments, unlike larger organisations that have multiple people in credit departments doing the legwork.
While having a credit insurance policy doesn’t replace credit management, it certainly complements it and can free up time and resources for a company’s staff to focus on actually running the business. Leaning on an insurer, as an outsourced credit management tool, can be an advantage when dealing with cash flow.
Insurers employ a team of analysts whose job involves reviewing publicly available information such as accounts filed at ASIC and mercantile reports as well as proprietary information, which can include payment experience from other clients, unpublished financials, management accounts and in person meetings with businesses.
Chapman says an insurer’s role is to take risk, so if they aren’t comfortable insuring a potential client, this knowledge can be vital and allow you to build a strategy around that buyer, which may involve shortened payment terms, increased monitoring, cash on delivery or an increased margin to account for the risk involved.
“One of the issues we often see is that when it comes to onboarding a client, business owners don’t have the time or the expertise to properly assess the credit worthiness of a counterparty,” Chapman says.
“Or they do the checks initially but don’t conduct periodic reviews. Lots of things could happened two years down the line; a business could have been bought and sold three times, they could have had a big bad debt, their premises could have burned down – all these things would impact their ability to make payments.”
Tracking a prospective supplier’s credit worthiness is a time consuming, yet critical task.
“Having a trade credit insurer on your side is a huge advantage because they’re continuously assessing your buyers, and they’re motivated to make sure that you’re not taking undue risk as far as the credit’s concerned,” Chapman says.
“They’re also aggregating payment experience across their client base so could be seeing the payment experience of 10, 20, or 100 clients who are dealing with your buyer, so they can spot the early warning signs.”
A typical scenario often involves a buyer that misses or disputes invoices. This is a common occurrence and on its own isn’t a concern but if a trade credit insurer sees the same scenario across multiple clients it’s a warning flag that the business has cashflow issues.
“A trade credit policy can also reduce or even remove collection costs,” adds Chapman.
Under Aon’s Debt Protect policy, you can pass an overdue debt to the insurer who will chase collection on your behalf and if it’s an insured debt, then they will cover up to 100 per cent of the costs to collect.
This article was written by Inside Small Business in collaboration with Aon.