Insolvencies are on the rise in Australia. Reports published by the Australian Securities and Investments Commission (ASIC) showed that the number of companies entering external administration increased by 7.3 per cent in the 2015/16 financial year, continuing a long term trend of rising insolvencies in Australia.
A significant number of these companies were in the construction industry, which has accounted for over 20 per cent of all insolvencies in Australia since 2005.
Small businesses dealt the hardest blow
The construction industry is burdened by nearly $3 billion in unpaid debts every year. This includes subcontractor payments, employee entitlements and tax debts that average $630 million per annum. It’s no surprise that businesses in our sector face an extremely high risk of entering into insolvency themselves, or risk becoming a victim of an insolvency elsewhere in the contracting and supply chain.
Small businesses and sole traders are often hit the hardest by insolvencies. Why? Because they’re further down the contracting chain, and therefore exposed to higher risk. The tendency of head contractors to allocate works to various subcontractors and labour hire staff shifts risk to the businesses on the bottom end of the contracting chain. Sadly, firms in this position are usually small businesses who can’t afford to bear the high risk of an insolvency.
But why us?
A recent Commonwealth Government inquiry found that the economy isn’t to blame for the high number of insolvencies in the Australian construction industry. Granted, the industry is highly competitive and sensitive to changes in the market, but to according to the Senate Economics References Committee, there are other forces at play.
Poor payment practices, high levels of competition and subcontracting arrangements all contribute to the growing trend of insolvencies in the industry. And the impact of this trend is real: insolvencies mean more wages go unpaid, people lose jobs and projects aren’t finished. It impacts everyone’s ability to do business.
How trade credit insurance can help
Regulations covering security of payment in this industry aren’t great, and businesses can’t rely the law to protect their income. The recommendations following the recent Senate inquiry look promising, but there’s no guarantee that they’ll be taken on board any time soon. For now, non-payment for work remains a real risk, and cash flow uncertainty is still a problem.
But there are ways to protect your income in the event one of your customers enters external administration. Trade credit insurance is one of them.
Trade credit insurance can protect your business against some of the risks of trading, including
- If a key customer goes into insolvency, liquidation, receivership or bankruptcy
- If a customer defaults on a payment, or if you have continued non-payment
- Political risks, including contract issues and export restrictions
Trade credit insurance protects your profits and your cash flow so that your employees can always be paid, and you can maintain good relationships with customers and suppliers. It’s an added layer of security for your business and your financial partners.
“If a customer owes you $120,000 and they enter administration, there is a direct hit on your bottom line,” says Michael Woodward of Gallagher.
“If you operate on a gross margin of 5%, you need to generate another $2.4 million of sales to cover the true loss to your business.
"Not many businesses can cover that missing cash flow in their business when a customer defaults. A trade credit Insurance program puts some added security around your business’s cash flow.
"Many of my clients have the cover to protect their livelihood and their staff in the event of a major customer failure.”
Talk to an expert
Gallagher’s specialist construction brokers have the expertise and industry knowledge to formulate insurance solutions for complex construction projects and assist stakeholders with managing their risk exposures.
This article first appeared in the Summer 2016/17 issue of CCF's QLD Insight magazine
To the extent that any material in this document may be considered advice, it does not take into account your objectives, needs or financial situation. You should consider whether the advice is appropriate for you and review any relevant Product Disclosure Statement and policy wording before taking out an insurance policy.