No such thing as a risk-free debtor’s book

Under current economic conditions debtor delinquency is a reality that businesses need to protect themselves against.

“While we are seeing a huge increase in bad debt now, we expect this to worsen towards Christmas and beyond as retailers and their suppliers begin to feel the squeeze in earnest” says Bridgette Wood, Business Unit Leader, Credit and Political Risks, Alexander Forbes Risk Services.  

Companies renowned for excellent credit management and low day’s sales outstanding are becoming a thing of the past. Debtors that were paying timeously are now extending their payment date by a few days. Debtors that were paying late by a few days are paying weeks late and so on.

“No matter how well you might know someone or how good their payment record has been, you don’t know how their business is being run, how they are making their money, or what theirown debtor’s book looks like” says Wood.  

Undercurrentconditions the shareholders, directors and officers of any business have an obligation to their staff, customers and suppliers to ensure that their book debt is protected.In fact, “from a corporate governance perspective, a competitively priced and accurately structured credit insurance programme is essential” adds Wood.

For example, in 2008 steel prices increased by almost 100%. Debtors that were purchasing for about R 200 000 a month were suddenly purchasing for double. “Who actually knew whether the debtor was credit worthy for the increased credit exposure? The fact that the debtor had paid on time up till then makes very little difference when the market turns” cautions Wood.

In short, a sale is not a sale until the money is in the bank. “Three million Rands sales is actually three million Rands debt until it is paid”explains Wood.

So, while turnover is an important part of a business, it can be fatal if not collected.

Putting together effective credit insurance takes a lot of experience and expertise. While smaller businesses do not have theskillsto get this right themselves, professional insurers have access to a plethora of information on debtors and can advise or warn companies of good or bad credit risks.

Professionally placed credit insurance also helps with the collection of outstanding or overdue monies since “large and professionally staffed insurers are best placed to mitigate effectively on a clients behalf” explains Wood.Debtors arealso less likely to default on payment with a company that credit insures their book since the news of a default may damage their reputation and hamper their ability to do business with anyone else.

So, while turnover is an important part of a business, it can be fatal if not collected.

Putting together effective credit insurance takes a lot of experience and expertise. While smaller businesses do not have theskillsto get this right themselves, professional insurers have access to a plethora of information on debtors and can advise or warn companies of good or bad credit risks.

Professionally placed credit insurance also helps with the collection of outstanding or overdue monies since “large and professionally staffed insurers are best placed to mitigate effectively on a clients behalf” explains Wood.Debtors arealso less likely to default on payment with a company that credit insures their book since the news of a default may damage their reputation and hamper their ability to do business with anyone else.