In light of increasing insolvencies Aon offers tips on how to cut back your debt.

The economic downturn of 2008 has been a challenging time for SMEs as an increase in insolvencies has in turn led to the rising risk of bad debt.

There were early hints of how 2008 would unfold at the end of last year when Euler Hermes, the credit insurer, reported a sudden increase in clients’ requests to accept longer payment terms.

Move forward to the second half of 2008 and most of the major credit insurers are reporting dramatic increases in claims for bad debt.  In the most afflicted sectors, which include construction and retailing, one insurer has reported a 100% increase in claims received.

Whilst many interested parties have anecdotally commented on increasing insolvencies, figures recently released by the Government provide a factual account of a deteriorating business environment.

In the second quarter of 2008 there were 3,560 company liquidations - a 15% increase on the same period a year previously.  Other corporate insolvencies – receiverships, administrations and company voluntary arrangements – increased by a startling 63% in the same period.

The credit insurance market is generally a reliable bellwether on the outlook for the economic environment and, accordingly, is ideally placed to offer advice to businesses aiming to trade safely through a downturn and beyond.

The Seven Steps to Avoiding Bad Debt:

1)    Communication – Talk to your customers. The closer you are, the more likely you are to get a true picture. If the first time you pick up the phone is when you have a problem you may end up acting on poor information.

2)    Integration – It’s no good having a good credit control department if you have a renegade sales team. Make sure your sales department understand that the credit controllers are not there to stifle sales and train them on how to use credit control as an additional sales tool. Equally the credit control team need to make sure they understand the pressures the sales department are inevitably under.

3)    Be realistic – In these credit-starved times you need to make sure your budgets and management have realistic targets. Whilst growth is always key to success, taking unnecessary risks is sometimes the key to disaster. Make sure you know your customer by using a reputable status agent or credit insurer instead of taking a chance because ‘you’re sure they’ll be fine!’ or worse ‘you’ve never had a problem with them before’.

4)    Be optimistic – Yes times are bad and yes there is an increase in insolvencies. That doesn’t mean though that you need to be OVERLY cautious.  You may be able to take advantage of competitors that tighten up too much on their credit control procedures. By using the right information you will be able to pick up new business whilst still avoiding bad debt.

5)    Know your customer – By law companies must have their correct registered address and company registered number on letterheads. One of the most common reasons for credit insurance claims not being paid is because cover has been applied for on the wrong entity. Always ensure you have the correct principal to contract. Always ask yourself, if something goes wrong who would you sue.

6)    Be strict – It is not uncommon in some sectors for customers to ask for payment extensions or reschedules. There is nothing wrong with a well thought out and fair repayment schedule. However be wary of customers who constantly ask for extensions or those which ask for extensions for the first time.  Credit circles are a good way of finding out if you are the only one having difficulties with payments. Alternatively credit insurers have a constantly updating picture of overdue payers, which can be used to your benefit.

7)    Expect the unexpected – You are never able to see everything coming no matter how hard you try or how experienced you are. You need to make sure you are capable of taking losses especially if you are working in risky markets. You can help mitigate your losses by having a good debt reserve or a well placed credit insurance policy.