Cheque’s not in the mail – protecting your business from bad debts
“Neither a borrower nor a lender be.” Shakespeare’s words may be sage advice, especially in challenging economic times, but it is a fiscal principle many businesses do not, or cannot, apply.
While some require upfront payment, a lot of businesses provide goods and services in good faith and issue an invoice afterwards. In fact, it has been estimated that Australian businesses exchange more than 1.2 billion invoices a year – that averages out to about 3.3 million invoices being exchanged every day of the year.
SMEs battle with late payments
Timely payment of invoices has been a challenge for SMEs for years. According to research by Dun and Bradstreet cited by EarlyPay, the average time it takes for invoice payments to be settled is 49.2 days, this is despite 30 days being the average payment term.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) points out payment disputes are the most common complaint received by his office. “Cash flow is the oxygen of enterprise and more than 40% of the cases raised with the ASBFEO Assistance function relate to disputes over payment times,” Bruce Billson said.
To help address the issue of tardy payments to SMEs by larger businesses, the Payment Times Reporting Scheme was introduced in 2021. Between its introduction and the start of 2024, the proportion of invoices paid to Australia’s small businesses within 30 days increased from 62.9% to 67.6% and the average payment term fell from 37.5 days to 35.8 days, according to Prospa.
While the issue of late payments is a key concern for SMEs, of even greater risk to the business is the non-payment of invoices.
Insolvencies are on the rise
Data from Insolvency Australia’s Corporate Insolvency Index showed 11,000 businesses became insolvent nationwide in 2024 – up 39% from the previous year. The number of court-ordered liquidations doubled (a 99% increase), while Director Penalty Notices rose by 50%.
“Insolvencies, the business failure rate, B2B payment defaults and court actions are all on the rise as businesses battle a combination of cost increases, high interest rates, wage increases, skilled labour shortages, increased ATO enforcement activity and soft consumer demand,” stated CreditorWatch as it noted all key metrics pointed to a challenging 2025 for Australian businesses, particularly small businesses.
The credit agency forecast insolvencies and the business failure rate would continue to increase in the first half of 2025 following the release of sobering data for November 2024 which showed insolvencies were at a record high in number and were up 57% for the year to November. The average business failure and closure rate for all sectors was 5.1% – the highest rate since August 2020 – and the failure rate was expected to climb to 5.6% over the following 12 months. B2B payment defaults were also at record highs and had more than doubled in the past year, while court actions remained elevated as the ATO maintained its ramped-up debt recovery efforts.
The prediction was accurate as data showed B2B payment (invoice) defaults were 42% higher in March 2025 than they were 12 months prior. This followed a 47% increase for the 12 months to February 2025.
CreditorWatch notes trade payment defaults have a strong correlation with a business becoming insolvent or closing voluntarily in the following 12 months. The risk of insolvency rises from 0.70% to 7.9% when a business defaults on an invoice payment.
The number of business failures rose in February 2025 to be up 17% year-on-year in March.
The highest rates of business closures were amongst food and beverage services/hospitality (9.4%), administrative and support services (6.4%), arts and recreation services (6.3%), retail trade (5.8%), construction (5.7%), and accommodation (5.4%) businesses. The business closures rate comprises voluntary and involuntary administrations, ASIC strike offs, de-registrations of solvent businesses and voluntary closures.
More businesses are expected to become insolvent in 2025, according to credit bureau Illion’s Commercial Risk Barometer. The report found that business failure risk increased in the fourth quarter of 2024, reversing much of the recovery seen earlier in the year. Overall, business failure risk is now 6% higher than two years ago and only slightly below the peak reached in late 2023. The analysis highlighted a 1.3% rise in the number of businesses at very high risk of failure – nearly double the net growth rate of new businesses entering the market, which stood at 0.7%. Meanwhile, there was a 3.7% increase in the number of businesses classified as at severe risk, suggesting insolvencies could climb by 2% to 3% in 2025 if the trend continues.
According to the ScotPac SME Growth Index report, 25% of Australian SMEs said they could be tipped into insolvency risk if they suddenly lost just one key client or supplier. Half of all SMEs said they would suffer severe cash flow problems or face negative financial impacts lasting three months or more. Some 4% of SMEs declared they would need to shut down immediately, and just 21% felt secure enough in their business diversity to weather such a loss without financial damage.
Protecting the business from bad debts
Cash flow can be a challenge for SMEs at the best of times and when there are issues with unpaid debts it can be nigh on impossible. Without access to the money owed, that business too can end up struggling, creating a B2B debt domino effect.
Bad debts is a situation no business wants to have to deal with but, at some point, many will. Business.gov.au offers tips on what to do if you haven’t been paid:
- Review the terms of your contract (or agreement).
- Send a reminder.
- Send a letter of demand.
- Get help with dispute resolution.
- Use a debt collection agency.
- Take legal action.
It also recommends five steps to take to prevent unpaid debt in the future:
- Know who you are dealing with.
- Have a signed contract.
- Use a good invoicing system.
- Set up payment terms and policies that will help you get paid on time.
- Understand your rights.
Another option to help safeguard your business and your livelihood from bad debts is to invest in trade credit insurance.
How trade credit insurance can help
Trade credit refers to the practice of extending credit to another business, allowing it to purchase goods or services without having to pay for them immediately. When a business offers trade credit, it is providing payment terms to customers. There are a number of reasons why a business would do this including increased sales, customer loyalty or competitive advantage. For many businesses, providing payment terms to customers is essential to transactions – but it comes with risks. The most significant being if the customer defaults on the payment.
According to Allianz, 35% of a business’ assets can be in the form of trade debts. Consequently, there is a greater chance that a business will experience a loss within its accounts receivable than any other asset.
Trade credit insurance (also sometimes called accounts receivable insurance or debtor insurance) protects businesses from financial losses caused by non-payment of commercial debts. It protects transactions between businesses which supply goods or services with deferred payments. It covers risks like non-payment, buyer insolvency, prolonged payment delays, or other credit issues that impact cash flow.
This form of business insurance reimburses a portion of the outstanding debt if a client is unable to pay due to various reasons, and in some cases coverage may also include transactions where payment is overly delayed.
The insurer effectively buys your bad debt exposure risk. So, if your customer(s) default on payments owed or goes into insolvency you can recoup non-payment losses and protect your cash flow.
When you take out cover, your trade credit insurance provider assesses the financial stability and creditworthiness of your insurable clients. This allows them to assign an appropriate coverage limit (the maximum amount they will reimburse you if a client is unable to pay). Some insurers will continue to monitor your client’s financial standing throughout the duration of the policy to ensure they maintain their creditworthiness. These insurers will also notify you if a client is experiencing financial issues and may also work with your business to come up with a plan to mitigate potential losses. When tracking the financial status and creditworthiness of your client, the insurer may choose to increase or decrease your coverage limit. Generally, you can purchase additional coverage for a specific client or extend your policy to include a new client if needed.
According to the International Credit Insurance & Surety Association, trade credit insurance pays most of the unpaid debt. The percentage usually ranges from 75% to 95% of the invoice amount but may be higher or lower depending on the type of cover that is purchased.
Trade credit insurance generally costs around a tenth to a quarter of a cent for every dollar of your overall yearly sales, notes Insurance Business. As such, if your business makes around $1 million in sales, your premiums could range between $1,000 and $2,500, excluding fees and taxes. However, your annual premiums could be higher or lower depending on other factors, including:
- the structure of the policy
- types of risks covered for each transaction
- the creditworthiness of your clients
- your credit terms and conditions
- your trading history, including past debts
- the industry your business is in, and
- where your clients are based.
Any business that offers products and services on credit terms may benefit from taking out trade credit insurance. It insures you against clients who declare insolvency, bankruptcy, or a similar legal status. Your policy may also cover you if a client has been allowed to postpone payments because of a bankruptcy protection arrangement.
Your EBM Account Manager can work with you to structure a trade credit policy to best suit your business requirements. We will discuss the risks that need to be covered (commercial risks and/or political risks) and the coverage (whole turnover, single buyer, or key accounts). Depending on your circumstances, there may be excess-of-loss policy options to provide coverage for catastrophic or exceptional losses from your largest clients. We can also look at customising a policy’s features and benefits to suit your business’ unique needs.
