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What Happens To Business Debt When A Company Is Sold

If you sell your goods and services on credit terms like Net 30 or Net 60, you may be wondering what happens to your accounts receivable and business debt when one of your customers sells their company.

Selling goods on Net 30 or Net 60 terms can be great for your cash flow, but it may pose some issues if a business is sold, and they still owe you money. A business sale can have some major ramifications when it comes to recovering debts for your small business.

In this guide from Niche Trade Credit, we’ll discuss the basics of what happens to the debt during a business sale.

Understanding The Two Most Common Types Of Business Sale & What They Mean

There are two common types of business sale in Australia, as follows:

  • Stock sale – Stock sales are usually used for larger firms in Australia, as they can be quite time-consuming and costly. In this method of sale, the purchaser will buy all of the assets and liabilities of the business. If a business sold in a stock sale owes you money, the new owner will still owe you that business debt.
  • Asset sale – An asset sale involves the transfer of specific assets and liabilities between a buyer and seller. Some assets and liabilities may be transferred, while others may not be. As you may be able to tell, this can make it very confusing when determining who owes you money.

It’s usually a good idea to try to recover outstanding liabilities and business debts before a company is sold – as it can be more complicated to try to do so after a sale.

How To Protect Your Business When A Customer Is Selling Their Company

When a customer is selling their company, you are personally liable for ensuring that you recover the debts that you’re owed. Here are a few

  • Stay aware of each customer’s status – Make sure that you know how your customers are doing, and keep an eye out for any information that may indicate they are selling their business.
  • Stop extending credit until the business is sold – If the business can afford to pay upfront, it’s best to stop extending them credit until it is sold. This will help avoid complications when trying to collect on business debts.
  • Be proactive about recovering outstanding invoices – If the customer owes you money, be proactive about communicating with the current owner and the new owner of the business.
  • Hire a debt collection service – If you don’t want to take legal action, you can hire a debt collection service to collect your debts, which makes it easier to recover what you’re owed.

Note, also, that if a company becomes insolvent and is not sold, it may also be hard to recover your debts from the business owners. Other creditors, such as lenders with personal guarantees, may have first claim to their business assets during insolvency. The Australian Tax Office may also collect unpaid payroll tax or other taxes during liquidation.

Trade credit insurance can help with insolvency, and also protect you if a company is sold and refuses to pay for past business debts. If a company in Australia or in another country goes bankrupt or becomes insolvent, your insurance policy will compensate you for a percentage of their outstanding debts.

Know How To Protect Your Company From Bad Debt When A Business Is Sold!

If a business is sold – particularly when it’s in financial trouble – it can be hard to recover the money you’re owed if you have been selling on credit. To protect yourself from this situation, you can follow the above tips.

You can also work with Niche Trade Credit to get credit insurance solutions that can protect your accounts receivable – or even hire us to help with debt collection and recovery. To learn more about your options and how to protect yourself, just contact Niche Trade Credit now.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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Trade Credit Vs. Trade Finance: What’s The Difference?

If you’re working in the world of export finance, you may be wondering what the difference is between trade financing and trade credit – and what the advantages are of using trade credit rather than other trade finance options.

In this article, we’ll explore the definitions of trade credit and trade finance, and why trade credit is often the best way for smaller-scale importers/exporters to do business. Let’s get started.

Trade Credit Is A Subset Of Trade Finance

The first thing that you need to understand is that trade credit is not separate from trade finance. Rather, it’s a type of trade finance. The term “Trade Finance” refers to the innumerable ways that trade, both foreign and domestic, is accomplished by importers, exporters and other businesses.

Trade credit refers to the extension of short term credit to the exporter, or to the importer of goods, or any transaction where buyers and sellers extend short term credit lines to one another. It’s essentially a short term loan that’s interest free and does not involve any financial institutions, provided by whoever is selling their goods and services.

The common “Net 30” and “Net 60” invoice terms are a good example of this. Once the goods shipped and you’ve created a bill of lading, you can invoice your customer. Then, you can give an exporter time to pay for the goods they want to buy and export, on the basis of payment in 30 or 60 days, with a 2% discount if they pay within 30 days. This type of trade financing helps improve cash flow and working capital.

The buyer has the option to pay right away and save, or to wait, if they need to acquire more funds to complete the purchase. This flexibility makes trade credit an important part of the global supply chain, and the basis for most international trade transactions.

These transactions usually involve working with a credit agency to determine a potential buyer’s credit worthiness. If you’re an exporter, for example, and cannot determine a potential customer’s credit risk, you may ask the importer’s bank or the importer to prepay for the first several shipments of goods when they open an account with your company. Then, as they show the ability to pay on time, you may extend them a longer credit line.

Other Finance Options

Trade finance includes trade credit, but also a variety of other different ways by which an international or domestic trade transaction can be funded, such as:

  • Letters of credit – A letter of credit is a document issued by a bank or another financial institution, and given to a product seller, on behalf of the buyer, guaranteeing payment. If the buyer does not pay, the bank does – and the buyer owes the full balance of payment to the bank.
  • Bank guarantees – A bank guarantee is similar to a letter of credit. It guarantees that, in the event that either a buyer or a seller cannot fulfill their end of the bargain, the bank will pay the required dues, which helps defray risk.
  • Cash With Order (CWO) – In this method of trade, the buyer of any item or items simply pre-pays for their order with cash, at the time of purchase. This is a common transaction method between companies who do not yet have a business relationship.
  • Cash On Delivery (COD) – With COD, the buyer pays upon receipt of the items. This is rather rare in modern trade, for obvious reasons – the buyer could refuse to pay, not have the funds, and so on.

The Importance Of Insurance For Trade Credit Transactions

Compared to other methods of trade finance, trade credit is very simple and flexible. Giving a client an open line of credit makes routine transactions much easier – but without trade credit insurance, you could be exposing yourself to risk.

Essentially, trade credit insurance is a way to defray the risk of giving a company a line of credit. It’s a policy that guarantees that, in the event of protracted default or bankruptcy, your insured accounts receivable will be paid out, based on the compensation schedule laid out in your policy.

This way, even if your clients fail to pay for a shipment or for their goods, you can ensure that your cash flow and your profitability are protected – and that your company can continue to grow. Because of this, trade credit insurance is a very important part way to protect your company.

Learn More About Trade Finance & Trade Credit From Niche TC!

With over 15 years as a trade credit insurance broker, the team at Niche Trade Credit has seen and done it all. If you’ve got any further questions, we can help you gain a better understanding of trade finance and credit insurance solutions. Contact us online now to set up an appointment.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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Difference Between Export Credit Insurance Vs. A Letter Of Credit

If you work in the world of exporting and international trade, and you are looking to safeguard goods shipped overseas to your buyers, you may be wondering if you should use a letter of credit, or export credit insurance.

Both of these methods can help minimize payment risks, and ensure that you are paid on time, based on the terms and conditions that you have signed with your foreign trade partner. So, what are the differences – and which one is right for you?

Find out by reading this article. We’ll discuss what you need to know, and how to choose between these two financial products, and ensure that your accounts receivable are safe from bad debt and default. Let’s get into it now.

What Is Export Credit Insurance? How Does It Work?

This is a specialised form of insurance that is typically used in international trade to protect accounts receivable when you extend trade credit to another party.

That is, trade credit insurance is intended to ensure that any invoice you send out to a customer will be paid, even if the customer defaults on the payment, or enters bankruptcy. Depending on your policy, you may be able to insure a single invoice or a single customer, or take out a policy that covers your entire accounts receivable.

The way that export insurance works is simple. If you deliver a shipment, goods, or services to a customer, and they do not pay due to bankruptcy, stop responding to you, or they default on their payment for any other reason, your insurance company will compensate you, up to the limits set by your policy.

You will usually receive between 85-100% of the value of the transaction from your export insurance policy. This ensures that, even if a sale does fall through and you are not paid by the buyer, your cash flow will not be affected, and your business can simply continue operation.

One thing to note is that most export credit insurance policies do have discretionary limits in place, which limit the size of your transactions. Transactions over a certain value must be approved by your insurer, via credit checks, and other checks to verify the legitimacy of a buyer.

What Is An Export Letter Of Credit?

An export letter of credit is another very popular way to safeguard your cash flow and ensure that you are paid by a buyer when your goods or services are delivered. Unlike credit insurance, export letters of credit are issued by banks.

A letter of credit is, essentially, a commitment by a bank to pay your company (the exporter), on behalf of the foreign buyer (the importer). When properly drafted, it is an extremely secure document.

Essentially, the document states that, provided that all of the terms and conditions stated are met (on-time delivery, quality of goods, etc.) the bank guarantees payment by the importer.

These documents are often issued by foreign banks, and can be “confirmed” by an Australian bank. Confirmation means that the letter of credit is not just backed up by the original bank – but also by the Australian bank.

The most common form is called an “irrevocable” letter of credit. This means that, unless both parties agree to a change, the document cannot be changed in any way. Revocable letters of credit may be changed, unilaterally, by either party – so they are much less useful as a legally-binding document.

Once issued, the letter of credit will be “called” as soon as your credit terms are met. For example, if your goods are delivered on “Net 30” terms, and must be paid for 30 days after delivery, the issuing bank will draw and send the funds to you exactly 30 days after the delivery of goods. This ensures that you receive payment in a timely manner.

What’s Right For Me? Export Credit Insurance, Or A Letter Of Credit?

This depends on a number of factors. For a larger transaction with a new customer, a letter of credit can be a good way to develop a business relationship – and make sure you get paid on time by their bank. However, letters of credit can be complex and expensive, and in markets and countries where banking institutions are not always the most reliable,  they may not be enough to guarantee payment.

Export credit insurance, however, will cover your costs for any default or bankruptcy on the part of your client. One benefit of this type of insurance is that, unlike a letter of credit, you don’t need the buyer to be involved in the process of developing and signing – meaning that you don’t need their consent. You can always insure your invoice, regardless of whether or not your customer is willing to sign a letter of credit.

To learn more, we recommend that you contact the team at Niche TC. We can clear up any other questions you may have, and ensure that you get the protection you need with our credit insurance solutions.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.