Home Business and Finance Trade Credit Insurance: helping subcontractors trade with confidence

Trade Credit Insurance: helping subcontractors trade with confidence

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Sustained pressures within Australia’s construction industry have led to a rise in administrations throughout the sector. Trade Credit Insurance can play a vital role in protecting subcontractors from bad debts by insuring receivables, safeguarding hard-earned revenues and providing quick access to replacement capital should clients default.

Over the past few months Australia has seen an increase in insolvencies across the construction sector, with increased pressures within the industry it is likely this number will continue to rise throughout 2022. This highlighted by one of the nation’s five largest construction companies, Probuild Group of Companies, falling into insolvency earlier this year and leaving over $300M in unsecured creditors.

The collapse of Probuild demonstrates counterparty risk cannot always be avoided, even when contracting to large, reputable firms. Subcontractors need to be aware of these risks as debtor defaults can significantly impact their businesses, causing cash flow instabilities and challenges to pay their own suppliers, creating a domino effect throughout the industry.

Despite an oversupply of work, builders are currently facing several sustained pressures on their margins. From rising costs of materials and wages to supply chain headaches and project delays. These pressures heighten the risk of debtor default for subcontractors.

Trade Credit Insurance is a vital tool that can be used by subcontractors to protect their businesses if a contractor is unable to pay, by insuring receivables.

WHAT IS TRADE CREDIT INSURANCE?
Trade Credit Insurance (also known as Debtors Insurance) protects businesses from bad debts. By transferring the risk of non-payment to an insurer, Trade Credit Insurance safeguards your cash flows while giving you the confidence to pursue new opportunities.

MKP Insight: For many businesses, their debtors’ portfolio is their largest asset.

HOW DOES TRADE CREDIT INSURANCE WORK?
When you sell your goods or services on credit to a customer, you place yourself at risk of non-payment. Trade Credit Insurance provides cover for your receivables in the event of buyer default. For many companies, a traditional Whole of Turnover policy is best, however, our solutions can be tailored to suit your business’s specific needs. These include insuring key accounts or key contracts; targeted cover of major buyers above a certain dollar threshold; or replacing an existing bad debt reserve with an aggregate first loss policy or insuring a single account. A typical policy includes an excess and indemnifies the policyholder for up to 90% of the debt.

KEY BENEFITS:
Trade Credit Insurance is principally used to protect businesses in the event that a customer is unable to pay for goods or services rendered. With the right policy however, it can offer your business so much more than securing cash flows.

Swift access to replacement capital
In the event of insolvency or non-payment of a customer, Trade Credit Insurance provides you with swift access to replacement capital, protecting your cash flow and ensuring your business can continue to operate.

Protect hard earned profits
Trade Credit Insurance gives you peace of mind that the risk of non-payment has been transferred to an insurer, so you can be sure you are paid what you have earned.

Increase sales to existing and new clients
A Trade Credit policy can provide you with the support and confidence you need to extend larger credit limits, more favourable trading terms and alleviate buyer concentration risks, gaining a competitive advantage in the market.

Improve credit management
Get greater access to information about your potential debtors and the tools to get paid faster by defaulting clients.

Strengthen balance sheet and governance
By placing your bad debt provision with a credit insurance policy and inject funds back into the business as working capital you can strengthen your balance sheet. The Trade Credit Insurance premium is tax deductible. Funds are placed back into the business through a claim payment, rather than taking out unrecoverable money from a bad debt provision.

Recover pre-insolvency and post-insolvency costs
Recover costs associated with collecting an overdue debt and the ability to protect yourself against a preference claim, which can occur up to 3 years from time of insolvency.

Save time and money
By outsourcing certain credit management functions to the insurer, including covering the hard costs of collection and legal fees when chasing an overdue debt, you can save valuable time and money and focus on what you do best: running your business.

For a free assessment of your current debtors and options on product cover and costs, contact Moody Kiddell & Partners today on 1300 000 657.

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