Mix the Global Financial Crisis (GFC) and high credit insurance claims, and the result: Credit Over-Cooked
Thursday, February 25, 2010 at 05:05PM By Kirk Cheesman
While the Australian economy, generally speaking, was stimulated during 2009 to a quick recovery, there were more underlying insolvencies and bad debt occurrences than ever before.
ICBA Australia’s claims statistics for 2009 show credit insurance claims jumped by close to 300% on the previous year.
Keeping the above in mind, there are a few current items to note:
1. Many businesses, during the GFC, reduced staffing levels, stock and overheads to cope with the reduction in trade. Now, as the economy and trading levels build, these businesses may have difficulty “turning on the tap” quickly to gear up for new projects.
2. Certain financial institutions will simply not have the funds available to assist and support businesses needing cash injections, or to increase over-drafts to manage trade recovery. Alternative financing has all but disappeared during the GFC and major bank competition has eased. Put simply, there is not enough global funding to support all businesses throughout the recovery.
3. In Australia, there’s an “unknown factor”. In this country we have an unknown quantity of business tax bills and we do not know how the Australian Taxation Office (ATO) will recover these amounts.
In such an environment, these three questions need to be answered by debtors in reviewing their ability to repay creditors:
- What capital is available to your business?
- How much do you owe the banks and can you re-pay?
- Are you up-to-date with your ATO payments?
Increased information flow - including up-to-date financial figures (identifying capital), questions relating to bank financing (highlighting cash available and key repayment dates) and information in regards to tax payments - is crucial in the next 12 months.
For all of the above reasons, the global credit insurance industry is placing more emphasis on obtaining key data and current information from debtors. It is clearly better to identify, at an early stage, a debtor’s ability to pay. Also, ”Blue Chip” or “long time” customers should not be excluded from this process. As we all know, many long-term businesses have failed during the Global Financial Crisis, mainly due to debt and funding issues and the inability to pay financiers as items fall due.
(Kirk Cheesman is Managing Director of ICBA Australia and New Zealand, National Credit Insurance (Brokers) Pty Ltd.)
