What is trade credit?

Many solar installers rely heavily on trade credit accounts with suppliers to assist with managing cashflow within their businesses.

For small businesses, equipment for new projects is typically collected (or delivered) a few days before the installation.  Payment, including STCs can take anything from a few days to a few weeks after this to be received.

Larger businesses often buy equipment in advance in higher quantities to take advantage of volume pricing and to ensure stock is available for projects as required.

For both types of business a trade credit account helps to fill the cashflow gap between when equipment is purchased, and when revenue from the sale is received.

Most solar wholesalers, including AC Solar Warehouse, offer trade accounts to regular customers.   The credit limit on these accounts is typically calculated based on the established trading history and is reviewed from time to time as purchases go up or down to ensure the limit supports the required level of business.

Trade Credit Insurance

Most solar wholesalers have trade credit insurance policies in place to (at least partially) protect them against loss should a customer’s business fail and be placed in liquidation.  This allows wholesalers to be able to offer trade accounts without the risk of being forced into liquidation by a situation where one or more of their customers default on their accounts.  QBE, Atradius, Bond and Credit Co and Euler Hermes are common providers of this type of insurance in Australia.  The trade credit insurers dictate the credit limits available to customers and broad account terms.  The policies impose strict requirements on wholesalers to report overdue accounts to the insurer and to comply with specific collection policies for overdue accounts.

Because the trade credit insurers provide cover to multiple wholesalers, they typically have visibility over some or all of the credit accounts that a solar installation business has with major wholesalers. This gives the insurer the ability to monitor a business’s credit position in real time and adjust or cancel credit limits should they feel that the risk of a default is increasing.  This is how an overdue account with one supplier can result in a business’s accounts with other suppliers being put on hold or limits reduced.

At AC Solar Warehouse we do everything we can to work with our customers to maintain trade credit accounts within terms because once an account is required to be reported to the insurance company restrictions are usually placed on the account and this can also affect other trade accounts held with other suppliers.   This can quickly create very difficult trading conditions for businesses which is not in anyone’s best interest.

If an account can’t be paid in full on time, then a payment plan should be proactively agreed and adhered to. If the payment plan is completed as agreed, the account can usually be reopened, and trading can continue.  If the payment plan is not adhered to, insurance companies will require the debt to be handed to an approved debt collection agency.

Impact of COVID-19

Once it became obvious that the COVID-19 pandemic was going to have a significant impact on the economy on Australia, trade credit insurance companies were quick to review their exposures.  QBE was the first to act, cancelling or substantially reducing credit account limits for many of their customers in the building and related industries.  In the weeks that followed most of the other trade credit insurance providers in Australia reviewed their policies and implemented various measures aimed at limiting or reducing their exposure to potential bad debts.

For solar installation companies this has meant that in some cases, they have had trade credit accounts with their wholesalers closed without notice.  In other cases, account credit limits have been reduced – sometimes by 50% or more.  Even in the best-case scenarios, limits have been reduced by 10% – 25%.  While no guarantees have been provided, it is expected that limits could be reinstated or even increased over time once the economy in Australia stabilises and the risk of companies defaulting on repayments reduce.  Likewise, there is no guarantee that the changes that have been made in recent weeks are the last ones that could be made should the economy worsen over coming weeks and months.

What does this all mean?

The best advice we can provide to solar installation businesses, at this time, is to maintain a very close relationship with your suppliers.  Wholesalers are able to appeal to trade credit insurers to maintain limits for customers based on historical credit history, regular volumes and forward orders.

If an installer spreads their business between multiple suppliers (buying every order from whoever offers them the cheapest price on the day) and is tardy with account payments, then they will have no-one to argue for them in a tight credit situation and could find themselves with very few options going forward. The first credit limits to be reduced are the ones that are not in regular use.

Conversely, by maintaining a close working relationship with a few key suppliers and ensuring accounts are maintained within terms, installers can be assured of the best possible chance of having stock available when they need it and on terms that support their business needs.

The final word

All businesses should consider their trade credit accounts as valuable financial assets – they are effectively a free line-of-credit which would otherwise have to be sourced from a financial institution at a significant cost.  The loss or curtailment of trade accounts can be disastrous for solar installation businesses in the current climate, where opening new accounts can be difficult if not impossible.  

Now more than ever, businesses should maintain close working relationships with suppliers and ensure trade credit accounts are maintained within terms.