Bad Debt
Protect your bottom line against
the risk of bad debt
Protect your bottom line
against the risk of bad debt
You can’t open a newspaper today without
reading about the latest companies to fall into
financial difficulty. Whilst Australia came through
the GFC relatively unscathed compared to many
other countries, its impact has left an indelible
mark on the Australian economy. The insolvency
levels for the 2011-12 financial year were the
highest they had been in the preceding 12
years, with nearly 900 companies a month on
average declaring themselves bankrupt. The
current financial year is not looking any better*.
Add to this the recent spate of natural disasters
which have caused many businesses to falter,
and we’re faced with a precarious economic
landscape which could cause your business
untold financial damage.
There is currently $1.2 billion of bad debt across
Australia. And no one is immune. Some of our
most iconic brand names have recently had to
close their doors. With the evidence showing
that no company is immune, it’s no longer
safe to think that a big name is a guarantee of
financial stability.
Why this matters to you
With the economic uncertainty prevailing
today, companies to whom you have extended
credit may very easily become insolvent or
default on their payment obligations. The
ensuing bad debt goes straight to your bottom
line and, without insurance in place, can have
a significant impact on your ability to trade.
That’s a risk that no company should take. In
fact, good corporate governance and recent
financial legislation call for the management
and mitigation of all risks, and that includes
credit risk.
Markets are in a constant state of flux and the
success of your business is intrinsically linked
to the state of your industry. Now consider the
implications of a downturn in your industry.
New sales become harder to find. Competition
squeezes your margins. Funding is increasingly
difficult to secure. So your trading situation
becomes much more uncertain. On top of this,
the risk of customer insolvency increases which
adds additional financial pressure.
Most companies today which operate in a B2B
market extend credit for the goods and services
they render. It’s standard practice. But you only
need to look at the Accounts Receivable item on
your balance sheet to realise how much of your
working capital is tied up in the debts owed.
Generally speaking, Accounts Receivable makes
up 30-40% of your balance sheet, making it
one of your company’s largest assets. So why
wouldn’t you want to protect yourself against
the loss of these assets? We use insurance to
protect so many things that are important to us,
but fall worryingly short when it comes to our
balance sheet.
What replacing
a Bad Debt
can cost you
Let’s assume that your company
operates on a 5% net profit margin.
One of your clients has defaulted
on a payment of $200,000.
If you were to replace that debt,
based on a net profit margin of
5%, you would need to make an
extra $4 million in new sales.
That’s a lot of sales to bring you
back to status quo.
As a general rule, TCI can return
90% of your money. In this case
then, you would only be down
$20,000.
Which scenario would you prefer?
How could Trade Credit
Insurance help you?
What is Trade Credit
Insurance?
Regardless of whether you operate in the
domestic or overseas markets, Trade Credit
Insurance provides cover against non-payment
of debts and helps you manage your risk
exposure. Having the right cover in place
encourages open account trade and dispenses
with the need for unwieldy letters of credit.
With other companies providing easy trading
terms you need to remain competitive. TCI
lets you do this without exposing you to
unnecessary risk.
Trade Credit Insurance protects your
Accounts Receivable, one of the most easily
cash-convertible assets on your balance sheet.
It effectively safeguards your business against
100% financial loss in the event of payment
default, and protects your bottom line.
TCI is especially beneficial to companies that
are looking to grow by branching out into
new products or exporting to new markets.
These growth activities often mean that
your business can be exposed to a number
of unknown quantities and new risks. With
insurance cover in place, you can explore new
opportunities with confidence knowing that
you’re protected.
Having a credit-insured book helps your
business grow in other ways too. If you’re
applying for finance or funding, TCI can boost
your borrowing power by providing the banks
with additional peace of mind about the
security of your business.
One of the hidden benefits of having TCI cover
is the access it gives you to an early warning
system for your industry. Your broker has
access to information from across the insurance
industry which enables him to pinpoint where
risks are likely to occur. With outside eyes
monitoring industry trends for you, you are
one step ahead when it comes to identifying
credit risks.
COM0048B 0513
* Source: ASIC insolvency statistics
Depending upon the type of cover you have,
in the event of a proven loss you will generally
be reimbursed for up to 90% of the loss. With
larger debts, that can sometimes mean the
difference between staying afloat and running
into financial difficulties yourself.
Trade Credit Insurance isn’t a one-size-fits-all
solution. It’s very much a bespoke type of
insurance. After all, all companies are different,
subject to different market forces, and face
different risks. Trade Credit Insurance cover is
built around the customer to ensure the best
possible fit.
What should you do next?
Talk to your Aon client manager directly to
arrange an appointment.
Our team works closely with clients to negotiate
the most competitive combination of price
and cover. It helps clients proactively manage
trade credit risk by providing ongoing support
throughout the policy period ensuring clients
minimise their exposure to high-risk debtors.
The benefits
of trade credit
insurance
Protects company P&L
statements and balance sheets
by transferring non-payment
risk away from the business.
nhances business growth
E
byfacilitating trade, protecting
profit andincreasing funding
opportunities.
nhances access to financing
E
and improved terms from the
banking market.
rovides an early warning system
P
forrisks in your industry and
from your keycustomers.
upports growth into new
S
markets and expansion of
existing operations.
Helps with cashflow management.
ispenses with the need
D
for Lettersof Credit.
Reduces financial loss by up to 90%.
rovides access to Trade Credit
P
evaluation tools and expert
credit decision support for more
accurate Trade Credit management.