In the last few months there have been some very large liquidations with many more to come. Some organisations are predicting that more than half Qld builders are insolvent.
Insolvencies like Privium at 80 million and BA Murphy at 10 million suck the lifeblood out of subbies and suppliers and thats where credit insurance comes in.
Its head in the sand stuff thinking it won't happen to you because all subbies are at risk no matter how well you investigate the builders you work for.
Increasing pressures in the Construction Industry and how to protect against potential bad debts is reason enough to at the very least, ask Prasidium Credit Insurance for a quote.
Material price rises and supply chain delays are both proving to be extremely difficult challenges for builders and the risks don't stop there.
As the price of materials soar, projects are delayed, and shortages of materials become a large issue. Many businesses aren’t making profits despite the oversupply of work. Add to this the pressure on wage increases and it is certainly a dangerous recipe for builders already operating on tight margins.
Corporate insolvency appointments in Australia have remained well below long-term averages through 2020 and 2021 largely due to the govt stimulus measures and insolvency protections but that is now changing.
With all the pressures in construction, along with coronavirus insolvency protections & govt stimulus measures being wound back, this could prompt a rash of insolvencies and, subsequently, redundancies, which could be a destabilising force on the local economy.
As the ATO ramps up its enforcement and collection activities through the end of 2021 and into 2022, this could add fuel to the fire! We are now seeing building industry insolvencies increase, putting those at the bottom of the money chain at substantial risk.
Trade Credit Insurance is heavily used in the Building and Construction industry by businesses of all sizes with minimum annual turnover usually starting around $750,000 upwards.
What is Trade Credit Insurance?
Trade Credit Insurance (also known as Debtors Insurance) protects businesses from bad debts.
It insures accounts receivable and protects businesses from unpaid invoices caused by customer insolvency and Protracted Default. For most businesses, the value of the debtor’s ledger, (the money you are owed), is one of the largest assets and yet it is often not insured.
Why Insure Your Debtors?
You insure your car and your house so more than anything else, it makes perfect sense to insure your business. After all, its your livelihood that pays for all your other insured assets.
How does Trade Credit Insurance work?
Trade credit insurance works by insuring you against your buyer failing to pay, so every invoice with that customer is insurable for the insurance year. A typical policy includes an excess as low as $2,500 and 90% coverage. If you have to claim on the policy due to a customer’s failure to pay, the excess is deducted and 90% indemnity applies. E.g. $100,000 ‘net bad debt’, minus $2,500 = $97,500 x 90% indemnity = claim payment of $87,750.
Even the most disciplined credit management cannot prevent bad debts and no matter how careful you are, your customers can sometimes fail to pay. Unless you demand payment up front or are covered by credit insurance, you risk it all and if you demand payment up front, that leaves you open to preferential payment claims in the event of an insolvency.
Key benefits:
Swift access to replacement capital
In the event of insolvency of non-payment of a customer, credit insurance provides you with swift access to replacement capital, protecting your cash flow, before permanent damage is done to your business.
Protect hard earned profits
A $100,000 loss on 10% profit margin is $1,000,000 in lost sales! How would your business cope if one or two of your major customers fell over? Give yourself piece of mind knowing all your hard work is protected and you cannot be affected from a bad debt by transferring the risk of non-payment to an insurer.
Increase sales to existing and new clients
A trade credit insurance policy can provide you with support and confidence to extend larger credit limits, more favourable trading terms and alleviate buyer concentration risk issues and gain a competitive advantage in the market.
Improve credit management
Obtain greater access to information on your customers having an insurer assess the credit risk before you commence work for a builder.
The normal channels of trade references and trading history bears less weight in assessing credit risk. In today’s environment it's not uncommon for a long standing company to fall insolvent showing no signs of distress and paying selectively within terms almost to the end. Privium is a prime example of this.
A credit insurance policy will provide you with far greater access to information than you would otherwise be able to obtain.
Improve access to finance
Is your sales volume creating working capital restraint? Struggling with cashflow difficulties? Trade credit insurance can support and strengthen access to credit facilities from financial institutions who can be named on the policy as a loss payee. A policy may help reduce financing costs.
Strengthen balance sheet
Replace your bad debt provision with a trade credit insurance policy to improve the balance sheet and inject those funds back into the business as working capital. The trade credit insurance premium is tax deductible and you will receive a much larger reserve than you would otherwise carry. Funds are placed back into the business through a claim payment, rather than taking out unrecoverable money from a bad debt provision.
For a free assessment of your current debtors and inside industry information before a builder becomes your debtor, click on this link for a trade credit insurance quote from Prasidium.
Subbies join here and access our private members forum, we offer two membership options, 6 or 12 months. We make exceptions for some trusted suppliers.
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