Business collapses in Australia have surged past pre-pandemic numbers over the past month, highlighting the need for businesses to check the credit risk of potential trading partners.
Recent data from the Australian Securities and Investments Commission (ASIC)has revealed that 831 companies had administrators appointed last month. This statistic has been the highest since July 2019, marking a sharp increase in company failures across construction, accommodation and food services, retail trade, and manufacturing industries.
Now that the economic conditions have become challenging, businesses will likely continue to face challenges beyond merely dealing with zombie companies.
Harsh economic conditions contributed to corporate insolvencies
Insolvency practitioners have noticed an uptick in inquiries and corporate insolvencies due to rising costs, interest rate increases, and inflation.
The construction industry has been hit particularly hard, with a third of company collapses in Australia coming from the sector. Fixed-priced contracts entered into over the pandemic were seen as a major culprit, putting pressure on profit margins as construction costs soared over the last couple of years.
Higher interest rates have also made it more challenging for businesses to obtain financing, which limits their ability to invest in growth or operations. In addition, higher interest rates made it difficult to repay loans.
Some of these corporate insolvencies are also zombie businesses that have become reliant on government COVID-19 support measures and have consequently depleted their capital due to unpaid debts and accumulating late payments.
How leveraging credit scores can protect your business from the fallout of insolvencies
With the recent collapse of several Australian companies, businesses must be proactive in managing their finances and ensuring that their partners and clients are financially stable.
Performing credit checks using business credit scores can help you mitigate your risks and make data-based decisions.
1. Identify potential risks
Credit checks provide valuable insights into a company’s financial health, including its payment history, business credit score, and current financial obligations. By conducting a credit check before entering a business relationship, companies can identify potential risks and make informed decisions about whether or not to proceed.
Incorporating credit scores and generating credit reports as part of your credit application process is a great way to identify risks early on.
2. Reduce late payments
Credit checks can also help you negotiate better payment terms and reduce the risk of late payments or non-payment. Leveraging your client’s business credit score as part of your accounts receivable process gives you insights into their credit risk. By knowing your client’s financial status, you can tailor your payment terms to their capabilities and reduce the risk of financial strain on your business.
Minimise your credit risk with Credit Insights
In conclusion, the recent collapse of several Australian builders serves as a reminder of the importance of financial due diligence and the value of credit checks in protecting your business.
By proactively managing your finances and using business credit scores to monitor potential partners and clients, you can reduce the risk of financial losses and position your business for long-term success.
Learn more about using business credit scores in your accounts receivable process. Speak with one of our credit experts today to learn about options for your business.