The Covid-19 crisis is turning into a payment crisis as companies tend to protect their working capital by paying their suppliers late. Defaults and insolvencies loom ahead. Companies need to understand structural payment patterns to help them triage bad payers from the good ones in finding their way back to growth.
A recent survey conducted by Euler Hermes Asia Pacific, in which a total of 171 Chief Financial Officers (CFOs) and Finance Directors in the region participated, revealed that a compelling percentage of companies have suffered from different levels of unpaid receivables (73%) and delayed payments (82%) over the past three years. The survey, which was conducted between December 2019 and February 2020, also revealed that only 25% of the respondents used Trade Credit Insurance as a risk mitigation tool.
Gaps in trade credit risk protection in Asia Pacific
Trade credit insurance, being one of the most effective credit risk mitigation tools, is crucial in helping companies identify new sales opportunities, grow their business confidently and protect cash flow. However, only approximately 5% of businesses in APAC buy trade credit insurance, compared to 15% market penetration rate in Western Europe. Asia Pacific is a diverse region when it comes to trade credit risk management maturity level. We have more mature markets such as Australia, Singapore and Japan where most multinational and large sized companies are involved in some extent of trade credit risk management. Emerging markets such as Malaysia, Indonesia, Thailand and China lack overall level of trade credit risk management knowledge and most companies rely on self-insurance. This, unfortunately, is an inefficient way of managing cashflow and an obstacle for growth. In general, the gap in APAC is the awareness of trade credit risk protection of small to medium enterprises (SMEs). A simplified product tailored to SMEs would address this gap and at Euler Hermes, we have developed a product specific for SMEs which is designed to reduce the time SMEs spend in managing customer debts so they could focus at what they do best – building their businesses.
Advice for companies that are considering Trade Credit Insurance
In this volatile trading environment with a significant increase of insolvencies, a steady cash flow and proactive risk strategy are imperative for success. I highly urge companies to consider investing in the trade credit insurance. Trade debts or accounts receivables can make up 40% or more of business assets. Just a few instances of defaults can make a big impact on your cash flow. The cost to a business of non-payment can be considerable. If you have a 5% profit margin and suffer a $100,000 debt, you’ll need to win new sales of $2 million to make up for the lost profits. In addition, your financial position can be weakened by bad debts in other ways. For example, due to adverse cash flow situation, you will have less capacity for investment. Banks and finance providers could also charge you higher interest, to protect their financing positions. The morale of your employees may be affected if they become worried about their future in the business and their employment. These consequences are worth consideration when weighing up the costs and benefits of trade credit insurance.
The Benefits of Trade Credit Insurance
There are many benefits to trade credit insurance:
Trade Credit Insurance Scheme (TCIS)
Are you concerned about the cost of trade credit insurance? Enterprise Singapore can support up to 50% of the minimum insurance premium for TCI policies provided commercially by Singapore-registered credit insurers. This is subject to a maximum lifetime support of S$100,000 per qualifying Applicant Company.