Managing Insolvency Risks with Trade Credit Insurance

In 2024, Australia experienced a significant rise in business insolvencies, with 11,053 companies closing their doors-well above the pre-pandemic average of 8,000 per year. As economic pressures persist into 2025, insolvencies are expected to surge even further, with projections reaching up to 16,000 by the end of the financial year.

The construction and hospitality sectors have been hit the hardest, facing mounting cost pressures, declining consumer spending, and an aggressive crackdown on unpaid debts by the ATO. Construction saw a staggering 3,217 firms enter administration in 2024-nearly double the closures recorded in 2022-while hospitality reported the highest insolvency rate, averaging 8.5% in the year to October 2024 and forecasted to rise to 9.1% in 2025.

The domino effect of delayed payments

Delayed payments and bad debts don't just impact the business owed money. When a company struggles to collect payments, it faces immediate cash flow constraints, making it harder to pay its own suppliers, employees, and operational expenses. In turn, those suppliers may also experience financial strain, delaying their own payments or cutting back on services.

This ripple effect can spread quickly in sectors with long payment cycles and subcontractor dependencies. Even businesses that are otherwise financially stable can find themselves in trouble if they suddenly face a major unpaid invoice or a key customer going under. This is where trade credit insurance can make a difference, breaking the cycle by protecting businesses from the financial shock of unpaid debts.

Trade Credit Insurance can safeguard against insolvency

With insolvencies on the rise, one such solution that businesses can do to safeguard themselves is trade credit insurance. As a financial safety net, trade credit insurance ensures that businesses can continue to operate even when their customers fail to pay or go bankrupt, protecting cashflow and reducing financial risk.

How does Trade Credit Insurance work?

Trade Credit Insurance helps to protect you against unpaid invoices at home or abroad, as well as saving you valuable time and resources. It includes 3 key features to ensure your trade receivables are effectively and safely managed.

Collection of unpaid invoices: Skilled and effective debt collectors will handle your unpaid invoices in Australia and/or overseas. They will strive to preserve the quality of your relationships with your customers at all times.
Information to make informed decisions: Each of your buyers will be assessed for creditworthiness to help you make the right credit decisions and reduce the chances of unpaid debts.
Cash-flow replacement: If collection fails, you will be reimbursed.

Signs of customer financial distress and how to stay protected

Recognising early signs of financial distress in customers can help businesses protect their cash flow and avoid bad debts. Some common red flags to look out for include consistently late payments, requests for extended payment terms, or a sudden reduction in order volumes. Frequent billing disputes, management turnover, or negative industry news can also signal deeper financial troubles. However, some customers may not show obvious signs of distress until it's too late, making it challenging to avoid financial risks entirely.

How Trade Credit Insurance with Coverforce can safeguard your cashflow

At Coverforce, we understand the pressures Australian businesses are facing in this challenging economic environment. Our Trade Credit Insurance solutions can help you mitigate business risks by safeguarding your cash flow, ensuring timely collection of unpaid invoices, and offering crucial information on your customers' creditworthiness. By partnering with Coverforce, you can act proactively to protect your business, make more informed decisions, and prevent financial strain from bad debts. To learn more, contact our trade credit team today.

REFERENCES:

https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/#s1-2
https://www.theaustralian.com.au/business/economics/australian-insolvency-appointments-surge-in-six-months-to-december-as-hospitality-businesses-collapse/news-story/17040c66cd956f8dd48fd5c4d2d28b4d

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