Home / Daily / Trade credit claims spike points to growing insolvency risk
25 January 2019
The economy could see more businesses becoming insolvent, with the number of trade credit insurance claims shooting up 41% in the December quarter from a year earlier.
Data collected by National Credit Insurance (NCI) puts the value of each claim at about $97,000.
Last year insurers paid out $64 million in trade credit claims, which was up 19% from 2017.
“Our findings reveal a higher level of defaults from overdue payments and collection activity,” NCI MD Kirk Cheesman said.
“Generally, an increase in these areas typically results in increased insolvency activity within 6-12 months.”
The data indicates businesses are becoming caught up in the patchy economic conditions, which saw many retailers closing down during the December quarter – a period when consumer spending is usually at its strongest because of the festive season.
Tasman Market Fresh Meats and Laura Ashley were among the big names that went out of business last year.
“When it comes to overdue debts, we’re finding that businesses are increasingly willing to take early collection action against their customers and suppliers,” Mr Cheesman said. “And if they’re not paid promptly, they’re increasingly taking legal action.”
The NCI Trade Credit Risk Index, a forward-looking indicator of company insolvencies, went up 4% to 798 points in the December quarter, the highest score in three years. The index is derived from combining insurance claims, collection actions and overdue payments data.
It may be the ideal time for companies to review their trading terms to prepare for the worsening business outlook.
“When companies collapse many others are left out of pocket, so it’s a good time for businesses to review their customers and suppliers and the credit levels they’re granting,” Mr Cheesman said.
“All businesses need to remember that trade credit insurance is the best safety net against bad debts, enabling them to insure against customers defaulting on payments due to insolvency.”