Trade credit cover vital as depressed business outlook persists

Despite the fact that the Business Confidence Index rose by 0,8 points in April 2015, the South African Chamber of Commerce (SACCI) and Industry has warned of a range of factors negatively affecting business sentiment.  According to SACCI, the first four months of 2015 suggests that the business climate is heading towards a more dismal 2015 than 2014 if the present inclination continues. 

“Faced with heightened load shedding, labour disputes, a weak job market, Xenophobic attacks which have weakened diplomatic relations and an unstable rand, business are struggling to find financial improvement in increasingly difficult trading conditions. As a result, many businesses are looking at trade alternatives outside of South Africa’s borders as local market conditions contract, but this comes with significant risks.  Regardless of whether a business operates locally or across borders, trade credit cover is becoming a business essential to manage and mitigate the credit risks associated with customer debtor portfolios. The failure of a major customer, or even several smaller customers, to pay can severely impact the financial health of an organisation and, in the most severe cases, even put a company into bankruptcy,” explains Maria Teixeira, Trade Credit, Surety and Political Risks manager at Aon South Africa.

Trade credit insurance is vitally important as part of a broader risk strategy to protect accounts receivable from bankruptcy, default and even political risks, and especially important for businesses when entering new and unknown global territories. “Business should be looking at ways to manage credit and debtor exposures in today’s global and hyper-connected economy. Accounts receivable are often the largest uninsured asset on a company’s balance sheet and yet often account for up to 40 percent or more of a company’s total assets. Trading conditions both locally and abroad have put accounts receivable at risk and are playing havoc with constrained cash flows. Many companies are also entering new markets and extending their supply chains across multiple territories, all of which further increases the need to protect themselves from risks involving trade debts,” explains Maria.

What is Trade Credit Insurance?

Trade credit insurance indemnifies a seller against losses from non-payment of trade debt arising from both insolvency or delayed/slow payment by a buyer.  It offers protection of accounts receivables against non-payment due to slow pay, insolvency or foreign non-transfer risk. Coverage is designed to prevent disruptive losses, reduce risk of key account concentration levels, and provide risk transfer of bad debt issues.  With trade credit in place, companies can also enhance their bank financing in terms of improving the lending relationship, enhance their balance sheet and gain access to more capital at reduced rates.  Trade credit solutions can also support sales in new or riskier markets, grow existing accounts, and strengthen customer relationships by helping buyers with letter-of-credit requirements and other issues. Trade credit also covers political risks such as currency inconvertibility, war and civil disturbance as well as confiscation, nationalisation and expropriation of a buyer.

Trade credit protects all size businesses

Small and medium businesses are certainly at greater risk of facing a fatal closure if a major debtor defaults as their balance sheets usually cannot carry them through a major default – it’s exactly this sector of the economy that needs to be protected with regards to its mooted role in job creation and economic growth. But it would be foolhardy to believe that large businesses don’t fall too as recent corporate failures have shown.

“There is still a misperception that credit insurance is expensive and complicated, and many companies never venture into the credit insurance space to their detriment, particularly small and medium sized businesses.  The other misconception is that credit insurers only insure good debtors.  Although credit insurers do not insure very bad debtors with serious adverse records, they do still insure marginal debtors.  But the important question that remains for any business leader is whether you would you want to deal with a potentially bad debtor and not know about it?” she adds. 

Creditors and all suppliers should not underestimate the dire implications for their business if major debtors default.  Job losses and retrenchments are on the up again as business struggle to maintain high sales volumes.  Drastic cost reduction programmes seem the order of the day as companies seek to avoid compromising their long term sustainability.  The lack of spending and extended non-payment of accounts by debtors is exacerbating already volatile markets.    

In the current environment where credit facilities are increasingly in demand, credit insurance becomes a necessity.  “Even defaulting companies battling to get credit insurance on themselves should protect their debtor’s book by obtaining credit insurance.  If they find themselves in distress, they should liaise early with credit insurers and get payment arrangements approved before they destroy their total credibility,” she advises.

Credit insurance is not complicated or expensive, and with rates stabilising it should be an integral part of a well-conceived risk mitigation strategy.  Payment protection through properly scoped credit insurance is a non-negotiable given the current market volatility and threats to business sustainability.