Quick and skilled at camouflage, supplier hopping customers have been plaguing Australian businesses before COVID-19, but their ill effects are more widespread than ever.
JobKeeper is due to end in March, and yet thousands of businesses are still struggling to make ends meet. This is especially true in Melbourne, where I’m still witnessing the effects of a 111-day lockdown (and a more recent snap 5-day lockdown) first hand.
As government support is wound back and lockdowns are still being imposed, it’s imperative to recognise cash-strapped business owners that are hopping from supplier to supplier without detection to avoid a potential negative multiplier effect across the economy.
Firstly, what exactly is supplier hopping?
If a debtor is unable to pay their supplier’s invoice, they’re placed on stop credit status. To overcome this, the debtor will move to a new supplier to place their orders and continue to trade. The cycle repeats as the business constantly moves around in search of credit they can’t afford to pay back.
If you’re a creditor who’s experienced any of the following red flags, you could be at risk from a supplier-hopper customer:
- Your customer is slow to pay you back. Maintaining control of your accounts receivables is essential for positive cash flow. Check their Payment Predictor to determine if their payment behaviour is worsening.
- There has been an influx of credit enquiries on your customer’s credit report. This usually means they’ve reached out to new suppliers.
- Payment defaults have been lodged against the business.
- Your customer appears and disappears from your ATB in monthly intervals.
Offering credit always presents a range of risks, but you can mitigate these with effective credit risk management practices.
So, how can you avoid the effects of supplier hopping?
- Perform a company credit check before choosing to trade with a new business.
- Ask for a trade reference from a current supplier of any new customer.
- Implement a strict credit policy and stick to it.
- Become a secured creditor through the PPSR and avoid the preference payment trap should your customer become insolvent.
We’ve got tough times ahead and with government stimuli winding up at the end of the month, this should theoretically weed out any non-viable businesses.
However, some will still cling on. Recognising these grasshoppers isn’t always easy but a business credit report will go a long way in providing suppliers with the information they need to stop them in their tracks and prevent the multiplier effect from spreading — both for their own business and the wider economy.