Many business owners forget the potential risks of doing business when they’re enjoying a steady economic climate. It’s important for business leaders to prepare in advance for potential future downturns, according to Martin Jones.
“When times are good, businesses can forget that things can change in an instant, becoming complacent," says Martin Jones, country manager, New Zealand, for Atradius.
"This means that good times can often be the most dangerous. We know from recent history that recessions go in cycles of around seven or eight years, and those cycles are only getting shorter. So businesses should take steps now to prepare for more difficult times.
As the saying goes, you can’t insure a burning house.”
It is important for businesses to safeguard cashflow from bad debt, which can damage profitability and business-supplier relationships, says Jones.
Credit insurers follow up bad debts on the business’s behalf and can also provide loss recovery services. Organisations in Asia Pacific can lose, on average, up to 50 percent of the total value of their trade receivables that aren’t paid within 90 days of the due date.(1) Credit insurers can collect debts that would otherwise be written off.
Credit insurance can also help to strengthen cashflow through a business so it can keep trading. It can provide early warning of potential payment difficulties. They do this by providing access to buyer credit rating information so businesses can better evaluate the risks of working with new customers - thus helping to limit unnecessary trading risks.
“A good trade credit insurer will add value to businesses of all sizes and act as the business’s eyes and ears on the ground. It can check that prospective customers are stable, creditworthy, and have a reputation that meets the required standards," Jones says. "Credit insurance providers have access to live data on millions of businesses which better informs their customers to make strategic trading decisions.
“Credit insurance policies cover both goods sold and delivered and services rendered. It can be tailored to cover other risks, like work in progress and binding contracts. This means businesses get fit-for-purpose cover.
"Credit insurers can provide flexible cover options that let organisations match the policy to the business requirements. The cost of this cover is usually very affordable and forms the basis of a sound, long-term financial plan. Although credit management cannot completely prevent bad debts, credit insurance enhances and strengthens credit management processes to protect cash flow.”
Martin Jones is country manager, New Zealand, for trade credit insurer Atradius.
(1) Atradius Payment Practices Barometer for Asia Pacific, 2014.