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How IT firms can protect themselves from insolvency

26 Apr 2017

Insolvency is a word that few IT firms want to encounter, especially because of late payments or non-payments that can potentially damage cashflow and operations.

A recent survey by Atradius found that for B2B invoices, 55% were paid late. This put pressure on suppliers. However, there are tricks IT firms can use to protect themselves against insolvency.

Atradius ANZ managing director Mark Hoppe says that the Australian IT market is benefiting from digital growth, technology upgrades, cloud and security solutions and much more.

“However, the IT market remains competitive with both domestic and international suppliers across different layers in the industry vying for customers. Usually, when IT businesses fail, it’s one of a combination of factors such as having the wrong product mix, facing high operating costs, losing contracts, and struggling to secure finance. Late payments can also put undue pressure on an otherwise-successful business,” he says.

There are five key ways that IT businesses can protect themselves from insolvency risk:

1. Improve customer knowledge: It is essential for IT companies to know who they are doing business with and understand their credentials and business environment. For example, if dealing with a retailer it’s important to know that business’s geographic reach, product mix, and key operating costs. The IT retail business in particular is generally volume-driven with narrower margins so a small mistake can lead to high losses.  

2. PMSI: A purchase money security interest (PMSI) is a security interest or claim on property that lets businesses who provide goods on an invoice basis to obtain priority ranking ahead of other secured lenders. A PMSI helps minimise losses if businesses fail. 

3. Transactional cover and financial guarantees: For well-established IT business, locked-box or escrow arrangements can be considered where the transactional value and structure is significant but financials are not supportive. Alternatively, for mid-sized value deals, these arrangements may be considered based on the customer’s situation and PMSI. Additionally, many local businesses are willing to issue a corporate or directors’ guarantee, which IT businesses should have verified by an asset liability statement from the director.

4. Invoice management: It’s imperative to have a dedicated credit manager within the finance team to ensure payment terms remain within globally-accepted norms of 30 to 60 days from invoice. Any variation or delay must be identified and addressed. Any line of credit extended to the customer should be built in a phased manner and monitored closely, and any single high value transaction should not be considered for run-rate business limits. Also, once any seasonal uplift is over, credit limits should be bought back to normal run-rate business requirements. 

5. Business protection: Trade agreements, contracts, and trade credit insurance are further strategies IT businesses can use to protect themselves from late payments. Trade credit insurance protects the businesses from risks that could send the business into a financial tailspin, including covering late or non-payment.

“Businesses with trade credit insurance are covered from exposure to risk and the cost of outstanding expenses. By protecting businesses’ income, it preserves cash flow and lets IT businesses innovate and stay ahead of their competition. Even more importantly, it lets them remain viable in an uncertain market,” Hoppe concludes.

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