Managing a credit squeeze – Ian Box says get debts down and review health of customers

Excerpt from ICBA Advantage Issue 2

Trade credit insurers are privy to customers’ forecasted sales as well as to reports of actual sales – so brokers see where economic expectations are met and where they aren’t across industry sectors, and gain an accurate view of the global economy. Ian Box, Managing Director of Australia-based National Credit Insurance (Brokers) Pty Ltd (NCI), has insightful opinions about the changes in banking practices, risk, bad debts and what actions to take at the business management level.

NCI (ICBA Australia) serves a cross-section of smaller customers to major corporates – advertising agencies, printers and suppliers in the retail, construction, mining, steel and timber industries. For more information, see www.nci.com.au.

Ian Box: There’s going to be a cleanout of financial markets. Bankers and financiers are going to find it harder to raise capital and therefore who they give their money to is going to be given some real review.

Question: Are there particular pressure points?

Ian Box: Yes, there are. I would say retail is still under pressure, consumer confidence is going to be really hit for a while. Certainly outside of the mining boom areas, we’re seeing construction and home building under pressure, and there’s a lot of trouble to come in that area. Further to that, we’re going to see pressure coming from banks to every business.

"Trade credit insurance is a well-respected and almost automatic financial protection mechanism for business. Corporations with strong balance sheets use credit insurance to protect the uncertainly of credit risk. It’s a risk that businesses don’t often understand they can insure," Ian Box, Managing Director of National Credit Insurance (Brokers).

Question: What does that mean in terms of lending practices?

Ian Box: Banks and financial institutions will tighten up on who they’ve lent money to, how much they’ve lent and what the asset coverage is. We’re seeing entities today struggling to get new lines of credit. When that starts to wash down and there’s a shortage of capital, then everyone who may have a very solid business, but perhaps borrowed too heavily, will be under pressure to get their debt level down. And the next issue is a stronger level of bank covenants put in place.

Ask the critical questions: What will be the circumstances of your larger customers? Do they have the same liquidity to pay on time? Now do a critical review of the issues your top 25 clients might face in their businesses. Typically good credit management focuses on opening new accounts and collecting money when it’s overdue – it very rarely focuses on a proactive basis to look at who your best customers are and whether they will still be your best customers.

Now ask yourself these questions: Have I borrowed too much money? What sort of pressure might I be under when it comes to review time? Work out what you’re going to do to recover money overdue to you as quickly as you possibly can – because the “excuse book” for non-payment is about to get longer.

Learn more from Ian Box by previewing the interview podcast with Heather Dawson at Australia’s Business Essentials – from which the questions and answers above were excerpted. Business Essentials is Australia's subscription-based audio business magazine and producer of business related audio and video programs – found at www.be.com.au.

Listen to the full Business Essentials audio podcast interview with Ian Box here.

(Excerpt from ICBA Advantage - The newsletter for trade credit insurance solutions - Issue 2. © 2009 International Credit Brokers Alliance (ICBA) www.icba-online.com. Company and product names are trademarks of their respective companies.)