Recovering from a liquidity crunch

Let’s face it, cashflow is the lifeblood of any business, big or small. It doesn’t matter if you’re selling goods or services, your business exists to bring more money in than it pays out.

The biggest threat to a well-run business is bad debts. You can have the most meticulous, disciplined credit management procedures in place and still be exposed to risks. When it comes to running a business, there is no escaping the risk of one or more debtors defaulting on payments.

It should come as no surprise then, that cashflow issues tend to keep business owners and managers preoccupied. It can take just one major debtor failing to pay and you’re left dealing with your very own financial crisis.

Figures from the Australian Securities and Investments Commission indicate small and medium-sized businesses are most vulnerable to insolvencies. Almost 85% of the insolvencies reported to the regulator had assets of below $100,000; 79% had less than 20 employees, and 43% had liabilities of no more than $250,000.

The leading cause of failure? Inadequate cashflow. So it’s clear how someone else’s inability to pay can easily have a domino effect that affects your own business. It can wipe out your profits, weaken the balance sheet, hurt your business credit rating, and eat up valuable amounts of your management time.

While it may be impossible to remove the risk of bad debts, there are certainly options that you can take to avoid a liquidity crunch if your debtor turns rogue.

Trade credit insurance is one of the best ways to protect against bad debts or insolvency in the event of a non-payment by a debtor. When you have trade credit cover, you are essentially protecting your accounts receivables from insolvency, payment default and other forms of credit risks. Put simply, you get paid for the goods and services you have provided from your trade credit cover, if recovering the debt is no longer possible.

Many SME businesses think such cover is expensive, complicated and even unsuitable. We don’t agree. It’s important to have all your bases covered, and trade credit insurance is certainly one investment you should consider.

If you’re looking at protecting your business from credit risk, give us a call now on 1300 MY Adroit and we’ll help you work out the cover that best suits your needs and budget.