National Credit Insurance Group MD Kirk Cheesman says insolvencies are on the rise, and trade credit providers are growing wary of a slowing economy’s effects on businesses.

Do you think we’re heading for a recession, and what impact could economic trends have on the trade credit sector?

That really depends how long the geopolitical risk remains in the Middle East. At this point, it is going to be hard to avoid. Listed companies are experiencing profit warnings, banks have increased bad debt provisions and predicted inflation increases and interest rates are going to slow the economy further.

How have the Middle East conflict and associated fuel issues affected the local trade credit sector?

[There have been] impacts to tighter cash flow, faster uplift in product/service prices (many businesses are charging surcharges in addition to products or services) and disruption to supply chains, which will greatly impact the trade credit risk sector.

Export delays, non-acceptance of goods or inability to ship will be a greater problem if the situation continues. The quarterly National Credit Insurance (NCI) Trade Credit Risk Index score has skyrocketed, given these increasing risks.

Fortunately, the specialist brokers and trade credit insurers have been very responsive in supporting insureds on their individual impacts, which, as an industry, is great to see. As an example, the fluctuation in fuel prices has seen the need for credit risk cover increase by over 40%. The insurers have supported this.

Is there a rising level of insolvencies?

Yes, definitely. We have already seen a shift up in Q1 of [this year], normally a “slow” time for insolvency activity, given the holiday periods.

Are we still feeling the impact of covid in the trade credit sector?

NCI predicted the “false economy” created during covid would have a lasting, two- to three-year-long tail. The washout of covid is still impacting “zombie” businesses that survived due to government support, which is no longer there.

In fact, the Tax Office has been chasing hard after billions of dollars in overdue tax from companies that didn’t have to pay during covid. Now, many do not have the reserves to pay. This debt will be compounded with the current Middle East impacts.

Are there enough trade credit options in the local market, and what’s happening with rates?

Plenty. Surprisingly, rates are under pressure for “clean” credit insurance clients/prospects. Capacity is higher than ever, and credit limit approval based on customer cover is very high ... possibly the highest I have ever experienced in 30 years.

Are clients struggling to afford cover as business costs rise?

Some businesses are having to choose between trade credit insurance or laying off staff due to increasing costs and reduced sales. Self-insurance of our product can be an issue in these economic stages. Government support is going to be needed to assist businesses.

For our sector, the reduction or removal of stamp duty on credit insurance policies would be a positive step, making it more affordable for businesses to buy. Australia is the only country in our region that charges such taxes.

What can businesses do to mitigate risk and make themselves a more attractive proposition for trade credit insurers?

The first step is to meet with a specialist broker to discuss their client base and operating model. Each trade credit insurance policy is unique and requires specialist knowledge of policy conditions and tailoring to [businesses’] own needs.

Start your renewal discussions early, [about] three or four months out. This way, the broker will be able to review the whole market for structures and cover. Build in good internal credit risk management and collection procedures, or at least review these every two years. Better controls and credit procedures ... will be supported by better cover and pricing from the market.

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