Well Covered
(Steadfast)

New data shows the extent of the COVID-19 hit to revenue at most Australian businesses, with two thirds reporting a decline in revenue as a result of the pandemic. Education and training is the worst hit sector, with 87 per cent of firms recoding a drop in earnings.

Moreover, economic growth recorded a 0.3 per cent drop in the March quarter, with expectations this figure will also decline in the June quarter, plunging Australia into a technical recession.

This is defined as two consecutive periods of negative economic growth. Against this backdrop, it’s important for firms to explore ways to protect their revenue. For some, trade credit insurance can play a role here, explains Steadfast’s broker technical manager, Michael White. “Trade credit insurance covers you for losses suffered as a result of one of your dedtors defaulting on trading debts they owe to you,” he explains.

This type of insurance can work in a number of ways. Businesses can buy it to cover one specific debtor, especially if they have a large exposure to them. The policyholder may be able to make a claim if the debtor goes into liquidation and can’t pay their debts. Other policies are more general in nature and not limited to specific debtors.

Rather, they insure a book of debts and an amount owed. In this instance, policyholders are not typically required to name the specific debtors covered under the policy.

Businesses do, however, have to meet certain conditions to be able to claim under these policies. The policy will usually stipulate how often the business needs to issue invoices after a sale, for instance immediately, within a week or within 30 days. Businesses that don’t meet this condition, for instance by only issuing invoices every 60 days, may find they are not operating within the policy’s terms and their claim may be denied.

“If you have trade credit insurance, it’s essential to actively manage your dedtors,” White says.

Policyholders will typically need to wait a certain time after an invoice is late to be able to make a claim, for instance the policy may only respond after an invoice is 30 days older or longer.

Additionally, insurers must also be notified within a particular timeframe after an invoice falls due and is not paid. For example, an insurer may stipulate in the policy’s conditions it must be notified within 30 days if an invoice is late. Insurers will also only cover a portion of the debt, typically 90 per cent. Policies will also only cover debts above a certain amount, such as those upwards of $3,000, not including GST.

Policyholders will also usually be covered in the event a debtor is insolvent or in liquidation

Trade credit idiosyncrasies

Trade credit insurance does have some specific characteristics of which policy holders should be aware. With most insurance policies, insurers can’t change the terms of a policy within a 12month period once a policyholder has taken out cover. This is not usually the case with trade credit.

“A trade credit insurer can change the terms of the policy mid-term,” says White, who says this has been a feature of the market during the pandemic.

“Especially when it comes to policies with a large insured value, often millions of dollars, trade credit insurers have been during the policy period reducing the sums insured down to much lower figures, in some cases, zero. Although this is not so much of a problem with policies for small businesses, because sums insured are a lot lower,” he adds.

Also insurers are no longer prepared to insure creditors of department stores Myer and David Jones due to the risk of financial failure of those companies.

While trade credit insurance may be an important part of a small business’s arsenal during an economic downturn, it’s still important to implement proper credit management practices. These include doing due diligence on debtors before offering credit and following up debts that fall due. That’s a good way to ensure you don’t have to make a claim under your trade credit policy down the track.