The Australian construction industry is currently experiencing high insolvency rates.

Last year, ASIC reported that 1,802 construction organisations in Australia collapsed due to insolvency. By contrast, there were just 218 in agriculture and 472 in manufacturing.[1]

Construction is currently more susceptible to insolvency than other industries. In 2014, 22 per cent of collapsed enterprises were companies in the construction sector, followed by 10 per cent in retail and nine per cent in the hospitality industry.[2]

There are four key ways credit insurance can help to mitigate business risks:

1. Gain valuable insights and knowledge about your buyers to make smarter business decisions

Regardless of how well a construction or plumbing business may know its market, or how good its relationships with its customers are, insolvency and payment default are commercial risks that can affect cash flow, profitability and confidence. By taking out credit insurance, businesses can reduce their exposure to unnecessary trading risks, and cover losses from non-paying customers. This takes away unnecessary worry about customers paying on time, helps to keep the business’ own payment schedule running as it should and maintain relationships with suppliers.

2. Reduce your business exposure to unnecessary trading risks

Construction works are most often the first assets to be insured. However, one of the largest assets on the balance sheet, the trade receivables, is commonly left uninsured and vulnerable to risk. The average business receivables asset makes up 30 to 40 per cent of the ledger, meaning that without appropriate credit insurance, the business is at high risk. Credit-insured companies are safeguarded against risks that could otherwise have crippling effects.

3. Stay ahead of the pack

When construction businesses fail to perform credit checks on all of their customers, they may start projects for businesses at high risk of default payments. A credit insurance provider can help mitigate the risk of unreliable customers by providing valuable insights and knowledge about customers. With access to live data on millions of businesses, credit insurers act as the business’s eyes and ears on the ground, checking that prospective customers are stable, creditworthy and have a reputation that meets the required standards. This helps the business focus on sales and business growth, protect its bottom line, and make better-informed strategic decisions – a clear advantage over competitors.

For construction businesses in particular, credit insurance can provide a valuable extension to the company’s credit management practices and help to ensure the business’s revenue and bottom line are protected.

4. Cover losses that aren’t your customers’ fault

Businesses often assume long-standing customer relationships and well-known customer brands can provide assurance against bad customer debt. However, it is risky to make commercial assumptions and gamble on them when trading on credit terms. Certain incidents, such as changes to government policy and natural disasters, can’t be attributed to the customer but will have equal effects on the bottom-line. A major customer going into insolvency could paralyse a construction or plumbing business without credit insurance to cover for the unexpected losses. Likewise, a major customer going into default during or after a build could paralyse a construction or plumbing business without credit insurance to cover the unexpected hit to income.

As the national economic forecast predicts poor industry performance [1] going forwards, businesses need to prepare for non-payment of invoices. Whilst many construction and plumbing businesses will never recover from unpaid debts already incurred, it is possible for business owners to easily and affordably protect themselves against the risks threatening their business.

Mark Hoppe is the managing director of Atradius Australia and New Zealand.

[1] Australian Securities and Investments Commission (ASIC) (2014)

[2] The ACT and Region Chamber of Commerce and Industry (2014)