While small- to medium-sized enterprises (SMEs) cannot completely protect themselves when faced with the collapse of a distributor, there are a number of steps businesses can take to safeguard the goods supplied, according to trade credit insurance provider, Atradius.
Mary Ibrahim, head of client services, Atradius said, “It is difficult for SMEs to protect themselves from the impact of another company’s downfall, especially if the organisation is located offshore. In such cases, businesses are usually forced to wait for payment if a partner or distributor collapses.
“Late or non-payment by customers is one of the primary factors behind cash flow issues for organisations, potentially affecting businesses’ ability to remain operational. Interrupted cash flow may prevent SMEs from paying their employees or purchasing stock, and the organisation may collapse altogether as a result.
“One company’s collapse may act as a trigger for others relying on its payment. These types of events can place immense pressure on organisations, so it’s important to be prepared for them.”
Atradius recommends businesses take five key steps to prepare for the potential collapse of a distributor:
- Be aware of the financial position of the businesses they currently or plan to work with, including high gearing or losses and mismanagement of industries or resources.
- Register goods supplied to customers with the Federal Government’s national online system, the Personal Property Securities Register (PPSR). Businesses that register through the PPSR are in the best position to recover their goods if payment is not received or the customer has gone broke. (1)
- Keep payment terms as short as possible by issuing invoices promptly.
- Know when payments are due and when payment is likely to be received, and be prepared to follow up late payments.
- Protect the business from late or non-payments with contracts, trade agreements, and trade credit insurance.
Mary Ibrahim said, “Business success depends on planning carefully. By putting preventative measures in place, an organisation can reduce its exposure to risk when faced with the collapse of a distributor.”