Here are the common questions we get asked about credit insurance.
Click on the plus icon for each question and the answer will display.
How do you know if a company is failing?
You’ll find there are a combination of factors, here are our top ten warning signs to look for:
1. The company has too much debt
You want to look at the company’s gearing ratio (i.e. how much of the firms activities are funded by the owners in comparison to creditors). If this ratio is high and paired with a low interest cover ratio (meaning how easily a company can pay interest on outstanding debt) then this can indicate a company is under stress.
A debt-fuelled acquisition spree (borrowing to buy a number of companies in a short period of time) is risk, even when you have the expertise and know what you are doing.
3. You don’t know what the business does
If you don’t know what the business does or how it generates cash, steer clear of it.
4. Qualified Accounts or Going Concern commentary
Qualified accounts are audited accounts where the auditor has doubts or disagreements with the firm’s management, this is a huge signal of failure.
Going Concern commentary is one step away, make sure you investigate fully.
Going concern commentary or an emphasis of matter, whilst not a qualification, can be deemed a way that an auditor covers themselves from being sued by making the reader aware of an issue but still signing off the accounts on a “going concern” basis.
5. Profit warnings
A profit warning advises that the company’s earnings will not meet expectations. This is normally announced two or more weeks before the official public announcement of the company’s earnings. Important you pay very close attention if there is a profit warning.
6. Profit vs cashflow
Be wary of a company generating large profits but little or no cashflow from operations. They could well be employing “window dressing” practices.
Window dressing can involve accelerating sales at year end on extended terms without getting the cash in or bringing forward sales to meet forecasts. It can also involve ‘murky’ valuations around returns on projects or particular assets. It can also relate to changes in depreciation policies or capitalisation of interest or expenses.
7. Deteriorating payment practices
If payments from the company are slipping or becoming irregular in ‘lumps’, follow up urgently.
8. Unstable Boardroom
If there are surprise resignations at the board level this can indicate trouble ahead for the company.
9. Trappings of success
Be aware of companies with high end, brand new cars, computer systems and furnishings. Directors could be rewarding themselves and ‘clocked off’.
10. Late filing of Accounts
This can indicate problems within the company or getting the accounts signed off by the auditor
Why do traders take out credit insurance?
To prevent bad trade debt by having buyers vetted by the credit insurer to ensure the buyers are correctly identified and can pay on time each time a sale is made to them
To enhance their credit control and cashflow positions. By insuring receivables against unexpected customer insolvencies and undue delays (protracted default) the trader gets relief from the risk of non-payment
To be compensated for insured losses
To obtain objective credit risk assessment on the buyer
To sell more safely to new customers – local and export
To expand sales to existing customers
To develop a trusting business relationship
If needed, to acquire additional working capital by using a trade credit insurance policy as collateral for its bank financing package
How does Trade Credit Insurance benefit you
There are five key benefits of a trade credit insurance policy:
1. Increases your sales and helps you grow
A Credit Insurance policy can help you identify and assess new customers supporting you beyond your normal credit risk appetite. This can also help to grow sales with your existing customers. You can identify new markets to trade in by working with the underwriter upfront. This will allow you to test the water using Atradius information and pre-determine what cover you could get at new business tender stage.
There are also options like offering more competitive payment terms and higher credit exposures which could be attractive to new and existing customers. but also protects you in the event they can’t pay.
2. Improves your cash flow
How many outstanding invoices do you have right now? Cash flow issues from late or non-payments are a key driver for insolvency. A Credit Insurance policy can help your cash flow by reducing the amount of days a sale can be outstanding, will make sure you get paid quickly after a buyer becomes insolvent or fails to pay and allows you to outsource collection services at no additional cost to get on top of overdue invoices quickly. This is important as statistics indicate that the sooner you get onto a late payment the more chance you have of recovering the debt.
3. Unlock better rates from your lender
Did you know a Credit Insurance policy may help you gain access to more finance & increase the amount you’re allowed to borrow? This is because lenders look favourably on businesses that have the added protection of trade credit insurance and will look to provide you better terms backed by the security of a trade credit policy that allows claim payments to be assigned to them.
4. Reduces bad debt provision and protects your bottom line
Bad debt is a reality in business so reducing this liability and taking off balance sheet is worth it.
A trade credit insurance policy allows you to free up some of the cash you’re keeping aside to cover bad debt as the policy will cover you when a customer doesn't pay. And you know what that means? Extra cash flow available for more strategic business initiatives that can grow your business.
Without Trade Credit insurance a bad debt of $100,000 hits your bottom line.
Operating on a 10% profit margin this will have to be replaced with $1,000,000 of new sales before you can return to the position you were before the loss.
Trade Credit insurance will protect against this and pay you quickly so that any new sales will be realised as growth rather than covering any bottom line shortfall because of a bad debt.
5. Decreases credit management costs
Credit Insurance helps you make better decisions quicker, improving efficiency and ultimately profitability. This gives you the comfort to focus on what you do best: growing your business instead of chasing bad debt. Atradius has recently launched Atradius Atrium which provides real time customer data so you can assess your customer portfolio credit quality and identify where you’re most exposed in Australia or across the globe.
How can I maximise my claim pay out?
Here are 7 tips to make sure your claim is successful:
1. Always trade within your Maximum Extension Period (MEP)
Avoid continuing to supply a buyer that is overdue beyond MEP as this will jeopardise your claim. Please refer to our Q&A titled What does MCT & MEP mean?
2. Don’t trade above your Credit Limit Decision
Your trade credit insurance policy covers you up to your approved credit limit. Any deliveries above that will not be covered. For example if you have a $100K credit limit approved and trade at $120K, the additional $20K will not be covered and will be excluded from the claim calculation.
3. Do not offer payment terms to customers beyond the Maximum Credit Terms allowed in your policy
When you set up your trade credit insurance policy, we agree to Maximum Credit Terms. Payment terms agreed with your buyer must be within your Maximum Credit Terms. Exceeding these terms will jeopardise your claim and can result in Atradius having no liability.
4. Ensure you take action to minimise any loss and try to recover the debt as soon as you realise there is a payment problem
You need to demonstrate action taken to minimise your loss. Evidence of this can include:
Issuing a demand letter
Appointing Atradius Collections to chase the debt on your behalf - we can offer contribution to costs of collection
Taking legal action
Pursue any PPSR, guarantees or any other security interest available
5. Ensure you notify Atradius of any overdue or adverse information as soon as possible
The sooner Atradius is informed of an overdue amount or adverse information, we can start protecting you and your business.
Notify Atradius if:
Your buyer becomes insolvent
Your buyer has Cash flow issues
Your buyer has offered to pay in instalments. A repayment plan can be considered, however the repayment proposal must be approved by Atradius
You are aware of any reason that may prevent the buyer from paying you
6. Understand exactly what is required to be able to justify any “discretionary limit” Atradius grants you
Your policy spells out the justification criteria for you to establish a limit under your Discretionary Limit. Ensure you fully understand that criteria.
7. Don’t jeopardise your cover by trading on cash terms with a buyer without our approval.
Your policy does not cover you for cash on delivery business, if approached by a buyer for cash trading contact Atradius immediately. Remember, any payments made in cash are allocated to the oldest outstanding receivable which may reduce any potential claim payment.
What does MCT & MEP mean?
Generally for Australian customers the maximum credit terms (MCT) are 60 days from invoice with a maximum extension period (MEP) of 60 days from due date of invoice. This accommodates 30 days end of month terms. If longer terms are required you are required to apply for it with reasons for longer terms.
If maximum credit terms in a policy is 60 days , it means the maximum credit terms you can offer your customer is 60 days. If you do not get paid within the 60 days, you are able to give your customers an extension of up to 60 days from due date of invoice. The debt only needs to be reported to Atradius if the extension period is breached. You must stop supply at this point as any deliveries made whilst your buyer is in breach of maximum extension period will not be insured.
Whatever your payment terms are on your invoice are the established payment terms with your customer in the event of a claim. The extension period starts from the due date on the invoice.
For example: If your invoice states payment is due within 14 days from invoice and your invoice was issued on 2nd July then your due date is 16th July. The maximum extension period starts from 17thJuly.
If your invoice states payment is due 30 days from end of month and you issue the invoice on 2nd July then your due date for payment would be 31st August and MEP would start from 1stSeptember.
The key here is although the policy may allow for maximum credit terms up to 60 days, it is the terms specified on your invoice that’s most relevant in the event of a claim.
How long does it take to pay a claim?
We’ll be able to examine your claim and notify you of the claim amount to be paid within 30 days, providing you’ve supplied us with all the documentation required. Providing these documents upfront, at the time you lodge your claim, can speed up this process. Here’s a list of what we need and why:
Invoices relating to your claim
To identify the policy holder and the buyer
To confirm the terms of payment because each policy has a maximum credit term
To see the product or service sold to determine if it’s covered by the policy
Evidence of payment terms (if is it not showing on the commercial invoices)
If payment terms are not indicated on the policy holders invoice, then this usually appears on a credit application or in correspondence between the policy holder and the buyer.
Statement of accounts for 6 - 12 months prior to the oldest outstanding invoice through to and including final statement
In Excel provide a system derived debtors ledger that includes individual transactions raised during this period with invoice dates, amounts, payments and credit notes. This allows us to do a reconciliation to determine if the maximum extension period has been breached which could mean an automatic stoppage on cover.
Evidence of debt
Evidence of the debt from a party other than the policy holder needs to be provided so we can confirm that debt is owing on the policy. For example evidence from a buyer, court or insolvency practitioner will be accepted.
All correspondence between the policyholder and the debtor, or other interested parties
Providing all correspondence in relation to the matter starting from the oldest invoice up to the date of claim can help support the efforts you’ve made to collect the money owed to you
Any securities, retention of title, caveats or guarantees
Providing details of the stock in the buyer’s possession and actions you’ve taken to minimise loss can help us understand any potential recoveries either before or post payment of a claim.
If we can recover money post paying your claim by pursuing a guarantor or recovering stock through a retention of title then you’ll gain a share of this in proportion to the loss.
Discretionary credit limit documentation
On your policy it will outline your discretionary credit limit procedure. This will let you know what documentation needs to be provided, it can include things like payment experience over the last 12 months within the maximum extension period, credit reports, trade references and compliance with credit management procedures
Declaration of turnover
Most of the time you’ll need to complete an annual declaration of turnover for each policy, usually every 12 months. Before we can pay a claim this needs to be up to date.
For export claims only:
Delivery/bill of lading documentation & debt correspondence
To determine that goods have left the country
To see evidence of the total debt owed and that it’s not subject to any dispute
Does your business need to register for GST?
Do sole traders & company’s need to be registered for GST to apply for a credit limit?
If the business GST turnover (gross income minus GST) is $75,000 or more then yes, the sole trader or company will need to be registered for GST. It is the responsibility of the sole trader or company to register for this, failing to do so might mean you need to pay GST on sales you’ve made since the date you were required to register as well as other penalties and interest. You can visit the Australian Taxation Office for more information on how to register. If your GST turnover is less than $75,000 then registering for GST is optional, if you’re a non-profit organisation your threshold for GST turnover is slightly higher at $150,000 or more.