Business insolvency risk high, says trade credit insurance broker

Trade credit risk for Australian businesses has never been higher, according to specialist trade credit insurance broker NCI.

NCI’s latest Trade Credit Risk Index Score for the first quarter of 2016 was characterised by some large insolvency activity, including My Baby Warehouse, Dick Smith and mining and steel manufacturer Arrium Ltd.

The Index also reveals an 80% increase in claims lodged in the first quarter of 2016 when compared to the same period a year ago, while advertising, building and hardware businesses had the highest value of claims received.

Further insolvencies are being predicted by NCI, given the high level of overdue reporting.

“The slowdown in the economic environment, especially in mining services and retail sales has had an impact on many of our customer’s clients,” Kirk Cheeseman, Managing Director of NCI, told Broker Buzz. “The January-to-end-of-March period is seasonally a peak period for insolvency, but the first quarter of 2016 has definitely been an increase on prior years.”

Outlining why the advertising, building and hardware sectors have been particularly hard hit, Cheesman added: “Any large insolvency, such as Dick Smith, or retail brands, normally have a media or advertising credit insurance loss attached to it.

“The building and hardware industries link to building contractors, home builders, electricians, plumbers and other mining services companies whom all have struggled over the past six months. Hence the level of insolvencies at the lower end of the contracting or building food chain where margins are extremely fine have been hit.”

Looking ahead to the rest of the year, Cheesman suggests the outlook is “murky rather than gloomy”.

“Our statistics are showing a high level of defaults in overdue payments and collection activity. Where there is an increase in these actions, typically it will result in a higher level of insolvency activity in to the next six to 12 months,” he said.

“However it is a good time for businesses to review their customers and the credit levels they are granting to ensure their customers have the facilities and capability to cope with tough economic conditions and have a good level of capital support to get them through the harder times.”