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Trade Credit Market Update
Barbara Cestaro, Manager of GSA’s Credit & Financial Risks division shares an interesting update on the Australian Trade Credit industry.
She speaks with Chris Doube (CEO for Euler Hermes Australia and New Zealand), John Sutherland (General Manager Credit & Surety QBE Australia & New Zealand), Mark Hoppe (Atradius Country Manager for Australia & New Zealand) and Graham Crozier (CEO of Coface Australia and New Zealand). They share their perspective on the current Trade Credit insurance market and what they expect the future to hold.
So, let’s start with the basics: What is a Trade Credit Insurance Policy?
Chris Doube (CEO for Euler Hermes Australia and New Zealand) explains that Trade Credit insurance is ‘a way to protect a company’s business from the non-payment of commercial debt. It makes sure that invoices will be paid, and allows a company to manage the risks of trade, resulting in a more strategic accounts receivable management.’
Mark Hoppe (Atradius Country Manager for Australia & New Zealand) adds ‘it not only protects a business but it allows it to grow with a greater level of confidence. Many businesses either go into new markets or new sectors without knowing the risks involved. Or worse, they don’t look at new opportunities because of this uncertainty. Credit Insurance provides market information, customer information and if needed, cover in the event something goes wrong.’
What is the market penetration of Trade Credit insurance?
Chris explains that ‘in Australia and New Zealand, Credit Insurance is still not known like it is throughout Europe and other parts of the world. The product is heavily underutilized as most companies simply don’t know that this type of coverage is available. Many SMEs in particular don’t know they can insure their receivables against non-payment.’
Market penetration is often quoted as being around 10%.’ John Sutherland (General Manager Credit & Surety QBE Australia & New Zealand) adds that ‘the Credit Insurance Market is worth an estimated AUD 200m in annual premiums, of which 75% is domestic and 25% is export.’
What can be done to increase accessibility for Australian companies?
For Chris, ‘it is important that all brokers talk to their clients about Trade Credit Insurance. The product is available to companies of all size’, so accessibility is not so much the issue as opposed to the awareness of the product and the many benefits it can provide.’ ‘Let’s not forget’, adds John, ‘that if we talk about on-line accessibility, the policy is easily accessible through 24/7 portals that deliver real time decisions and easy management.’ Graham believes that ‘on-line delivery and automation can still be improved significantly to make the product easier to access and to manage. We can also improve in the area of product development.’
How a policy does help to protect a company’s business?
John says that ‘it protects one of the clients’ most valuable assets, their cash flow.’ Chris agrees ‘the protection against the insolvency or non-payment by a buyer provides cash flow and profit protection. The policy mitigates both commercial and political risks that are beyond a company’s control.’ ‘The policy,’ adds Graham, ‘can be the difference between a business delivering a successful result for shareholders. The policy also provides assistance with formal debt recovery activity if needed.’
When talking about the benefits of a Trade Credit Insurance Policy, everybody agrees that a key benefit is the ability for a company to grow their business. Chris says that ‘it gives a company the confidence to expand sales to new and existing customers and markets.’
Graham confirms that ‘many clients over the years have said that the ability to grow their businesses and access new markets confidently have been key buying motivators. Trade Credit Insurance allows suppliers to extend credit where the alternative might be pre-payment or cash, secure payment terms or perhaps not undertaking the transaction at all.’
John mentions also that ‘thanks to the policy, companies gain confidence in dealing with new customers or entering new industries, regions or sector. But also helps with dealing domestically with regulations, like for example PPSA. It also acts as an early warning system for bad payers or poor risks.’
Why should a company consider a Trade Credit Insurance Policy?
Chris has no doubt ‘there is a greater chance that a business will experience a loss within its accounts receivable than any other asset. With an average of 40% of a company’s assets in the form of trade debts, account receivables are a critical component of the balance sheet. Yet while companies are generally insured against property loss, liability or other unpredictable, high-exposure events, the most valuable (and vulnerable) assets are left open to loss.’ Graham adds that ‘where money is tied up in late payments or bad debts, the impact on a business’s ability to grow can be impacted severely.’
What are your tips for companies looking at Trade Credit Insurance for the first time?
Mark doesn’t hesitate ‘don’t think of it as a cost. Think of it as an investment. How can it help you grow?’ Graham adds, ‘the key is to access the right advice and to understand the market thoroughly. As with any investment, considering all aspects before committing will ensure the chosen product is the right solution for the business. Utilising the services of a broker specialising in Trade Credit Insurance to access the market is a recommended approach so that a full review can be undertaken and options tabled for discussion and understanding of the relative merits of all offers.’ John agrees on this last point - ‘contact a broker specialised in Trade Credit Insurance and build a relationship with your broker and underwriter to ensure they fully understand your business so correct policy is put in place.’
If you would like to know more, please speak to Barbara Cestaro