Avoiding Debt: How To Plan For A Prosperous Future

More than 60% of small businesses in Australia close within their first three years. This is unsurprising as small business owners face a number of challenges and threats every day.

One of the most common struggles businesses face is cash flow. If you don’t have enough money available to pay your staff and suppliers or purchase more products, your entire operations will grind to a halt. Cash flow problems can be the result of a number of circumstances. Overheads can quickly add up, from your office space to employees and stock.  Add to that clients not paying invoices on time, tax and other additional costs, and cash can become tight.

It’s easy to slip into the borrowing mentality, which will keep you afloat for the time being, but this can amount to significant debt that can be difficult to recover from. The following are some of the steps you can take to avoid going into debt, and at the same time, improve trust in your clients, customers and suppliers when it comes to payments.

Carry out Credit Checks on Clients

Before working with a client, a credit check can help you ensure that they are solvent enough to pay their fees to you. This can be done easily through Equifax’s Business Credit Express or Illion Express, which are databases of real-time Australian consumer and business information. For a small fee, you can find out all the information you need in relation to a company’s credit history. ASIC’s Business Checks app can also be useful in the client evaluation process as it takes you through a practical and easy checklist to authenticate the information that a business provides you with.

Ensure You are Invoicing Properly

It is vital to ensure you are sending out your invoices correctly. The Australian Government website provides practical details on how to create an invoice, what should be included, and different types of invoices that you can send as well as other useful information. The next step is to ensure you are accurately tracking what invoices have been paid, as nearly three-quarters of all business invoices are paid late.

Set Up Debt Recovery Procedures

Late payments can result in a “debt recovery” scenario. You should review the terms of the contract for payment conditions and debt recovery options so that you are aware of your options if this happens.

There are a few things that you can do to recover your payment in this situation. First, send an initial reminder for payment as well as several follow-ups. The Victorian Business website has templates available for all steps of this process. If you still haven’t been paid, you may need to consider using a debt collection agency or service. However be aware that this is likely to severely damage your relationship with your client, so should only be used as a last resort.

Explore Your Insurance Options

While there are precautions that you can take to ensure your business stays solvent, there is the possibility that your business may still end up in debt.  There are certain insurance covers that can protect your business from debt that can temporarily or permanently close your doors.

The most effective cover to manage and reduce exposure to bad debtors is Trade Credit Insurance. Trade credit insurance protect debtor assets on the balance sheet. It does this by covering the policy-holder for losses incurred as a result of:

  • The insolvency of a customer
  • Buyers refusing to accept ordered goods
  • Customer default in paying an outstanding debt

The cover can also be extended with Export Credit Insurance.  This covers not just debts but other commercial risks of trade and political risks that may prevent payments being made, such as:

  • Failure of a bank to honour a letter of credit
  • Repossession of assets
  • Wrongful or unfair calling guaranteed, bonds or contract warranties

If this is an issue that you think may affect your business, speak to us to find out more about your insurance options to ensure you stay profitable into the future.


Conditions apply for each policy and the information expected from you for a policy to trigger. Coverage may differ based on specific clauses in individual policies. Please ask your broker to explain the additional benefits and exclusions pertaining to your policy.  The information provided is general advice only and does not take account of your personal circumstances or needs. Please refer to our financial services guide which contains details of our services and how we are remunerated.