Risky business: Australian companies shy away from credit terms despite competition

Australian companies are facing a dilemma, with many increasingly reluctant to extend credit terms to their customers to retain or win business even as heightened competition ranks among their biggest concerns, according to the Survey of Corporate Credit Risk Management in Australia conducted by Coface Australia, the local arm of one of the world’s leading international credit insurance and credit management organisations.

The recent survey of 553 Australian companies, which seeks to understand the payment behaviour of businesses, showed that only 38 % relied on providing credit terms for at least 75% of their sales in 2011, instead favouring more secure forms of payment such as collect-on-delivery. That’s a significant decline from the 55% and 57% recorded in similar surveys in 2010 and 2009 respectively, a trend that could make Australian companies less competitive on the global stage. 

Despite the decline in businesses providing credit terms, increased market competition was one of the biggest concerns for companies, with some 45% of business operators blaming competition for the need to extend credit terms to customers in order to win or keep business.  

Chris Doubé, General Manager of Coface Australia said: “The results of the survey indicate companies find themselves in something of a catch-22, with many of them clearly concerned about the increased risk of extending credit terms to customers just to keep pace with the competition, but they are increasingly concerned about the financial risks involved in extending credit.

“The ease of international online purchasing poses new risks for Australian companies as they now compete increasingly with global suppliers. The number of companies offering credit in China, for example, grew from 65% in 2008 to 90% in 2011, suggesting Australian customers looking for flexible payment terms could start looking to purchase overseas if they can’t find suitable payment terms domestically,” Mr Doubé said. 

“Australian businesses need to provide more compelling payment terms or risk losing customers to overseas suppliers. While there is an increased risk to revenue, we suggest local companies make more use of credit management tools such as credit insurance, which allows them to extend credit terms in order to keep or win business while reducing the risk of doing so,” he said.  

Coface estimates that only 5 to 10% of Australian companies use credit insurance to mitigate risk – a slight increase on previous years - compared to around 40% in Europe. 

“As a general rule Australian companies still fall short of their counterparts in the U.S, Europe and Asia in their use of credit risk management tools, particularly credit insurance,” Mr Doubé said. “This is a worrying trend that could see them lose business to competitors.” 

A decline in the number of Australian businesses offering credit terms to customers could be attributed to an increase in overdue payments. The survey by Coface revealed that more than half (51%) of businesses that offer credit terms also had 54% of their payments overdue by up to 60 days.  

"It's obvious that Australian businesses are more risk averse than their international counterparts, partly due to the lack of credit management strategies in place. However, it's an important competitive advantage in today's market to have the right tools in place to be able to offer flexible payment terms without increasing financial risk," Mr Doubé said. 

In other findings, Australian companies were more optimistic about the Australian and Asian economies than they were about the global economy. Some 42% of respondents said the domestic economy had less than 25% chance of entering a recession next year, about the same as for the Asian economy, while only half that number were as optimistic for the global outlook. Interestingly, increased wages pressure was ranked the highest concern among companies (41%), followed by inflation and higher commodities prices (34%) and tighter monitory policy and access to credit (34%).  

“Again, the concern about higher wages may be feeding into the theme of increased competition as a notable trend in this year’s survey,” Mr Doubé said. “It could possibly be explained by tight margins and cash flow in a competitive market making it difficult for managers to justify salary increases, which could in turn impact staff morale and productivity.”  

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