Author Katrina Shanks, CEO Financial Advice NZ. Article originally published in stuff.co.nz.
OPINION: Many businesses are right now caught in a perfect storm.
With the Reserve Bank having tightened up the economy by raising the official cash rate (hopefully for the last time for a while), households have had to handle or absorb higher borrowing costs, on top of high inflation.
Together, interest rates and the high inflation they are designed to combat are severely restricting spending, as is meant to happen, but that means the squeeze is on businesses.
And staff shortages are not helping.
Few businesses are immune as retail sales drop.
The latest data from credit data company Centrix shows most sectors are suffering. Building companies, property companies, retailers and hospitality venues are suffering most, if you take credit defaults as the measure. And it’s usually the best measure.
The number of defaults is concerning.
Overall, they were up 13 per cent in April, year-on-year.
Courier deliveries and pick-up services were the highest, at 36 per cent, followed by construction at 18 per cent, property and rentals 17 per cent, retail 12 per cent, and hospitality 10 per cent.
In addition, company liquidations were up a huge 31% year-on-year.
All of which means if businesses aren’t already keeping a very close eye on their financial situation to make sure they can meet their payment obligations as the year marches on and the cost-of-living crisis deepens, as most predict – then they should be.
The problems are two-fold.
One is when businesses are caught out as their customers are late with their payments. Then they struggle to have the cashflow to pay for those goods from their suppliers.
For example, a plumbing supplies business has given credit to a tradie for goods, but the tradie can’t pay immediately because they don’t have the cashflow due to slow payers, leaving the supplies business carrying a big credit line and ever-increasing interest costs.
The other problem is for businesses who are part of a supply chain and who need to buy materials – maybe that plumber who is relying on his pipes and taps from a small supplier who doesn’t have the goods on hand because they haven’t been able to pay their bills and their credit is on hold. The plumber needs them to finish a job so they get paid, but the supplier can’t supply because they’ve got poor credit.
The plumber is forced to seek other supplies but at a different price point to that quoted and has to carry losses on the job.
So, what do you do if you’re that plumbing supplies business. Or that plumber? How can you avoid getting caught, often through no fault of your own?
The first thing you should do, particularly in the existing slowdown but also as a regular part of your due diligence business habits, is to run a credit check on everyone you allow to run a credit account with you.
Every business and every person has a credit score, and this is all about checking them out to see if they have a good payment or credit record – to make sure they haven’t got bad debts anywhere that could impact on your credit flow.
This is especially essential if they’re new customers or suppliers and you have no history with them.
It’s different if you have a long relationship with them and you know they’ll give you a warning if things get tight, or you know they’ll be good for it and have backing, or you them often enough to notice changes in their behaviour.
If that happens, and you are forced to take action, that can be a tough conversation, but in the end it’s all about looking after your business to ensure you have cashflow to keep you going.
Being open and honest can often help you arrive at a compromise that suits you both, and it could well be they would appreciate it.
Such options could include moving to something as simple as a payment plan.
It’s another good reason to stay in regular touch with your customers and suppliers in times like these, so you can spot any warning signs and get in front of the problem so you can both manage it.
In worst case you may have to insist on a cash-only basis.
Now is the time to be very aware of the state of your debtors’ ledger, and not let those 30 days’ overdue invoices turn into 60 days, or 90 days, or worse …
It’s about not letting it just sit there but proactively following it up before it gets too long or too big, by which time it may be too late.
So, what is a credit score and how do you check someone’s credit?
A credit score is a number between zero and 1,000 that indicates how likely you are to pay your bills on time based on your payment history over the previous two years.
Every transaction you make affects your score positively or negatively. The higher the score, the more likely you are to be able to get those goods and services on credit.
Be aware that it’s not just your company’s score your suppliers or customers are interested in. Sometimes it’s also your personal credit score, which can be a pointer to your creditworthiness.
Banks and finance companies often ask for personal scores as a standard check on a business, looking for the number of credit lines you have open, the borrowing limits, and if you pay on time.
You can do checks online via a handful of companies, including Centrix, Equifax, illion, Checkmate, CreditWorks and ClearScore.
Most of them charge just for the checks you order, as opposed to an ongoing fee. It’s worth shopping around for the one that suits you best.
They also offer advice on how they calculate your credit score and how you can improve it, so when it’s your turn to be checked, you are seen as someone who is safe to do business with.
