Sole traders make up more than 60 per cent of Australian businesses. It is the simplest and cheapest business structure, with low start-up costs, no registration or annual fees and fewer reporting requirements. An individual owns the business and has full control over all its assets and decisions. If you’re a sole trader, securing cash flow is fundamental to your survival – on a business and personal level.

In this article, we discuss the challenges faced by sole traders and explain how CreditorWatch can benefit them. 

Challenges faced by sole traders

Unlimited liability  

For sole traders, there is no distinction between personal and business assets. Sole traders have unlimited liability, which means they are legally responsible for all aspects of the business, including its debts and losses.

In terms of raising capital, options are limited as you have full financial liability for the debt. You may have to rely on the provision of credit, which can be risky especially for brand new businesses.

While your personal income and assets can be utilised to secure loans and fund your business, all your personal assets are at risk if things go wrong. If your business fails and you’re unable to meet your liabilities, your personal assets would be sold to repay business creditors; you could face bankruptcy and even lose your home.

This is unlike companies which have limited liability as they are separate legal entities from their directors.

Fewer tax benefits 

For sole traders, business income is taxed at personal income tax rates which are higher than company tax rates. You also need to keep financial records for at least five years. It is especially important to keep up-to-date accounting records. You may use accounting software and/or get an accountant to manage your books.

Risk of working with unreliable entities

All business owners face the risk of not being paid or being defrauded. However, this has a bigger impact on sole traders who tend to operate on tighter profit margins. If you’re working with only a few customers and one of them defaults on their payment, this could significantly impact your income and impede business growth.

If you’re working with a key supplier who unexpectedly collapses, this could result in disastrous financial, operational and reputational consequences. If you plan on entering a partnership, you will need to be confident that you’re working with a financially stable entity who won’t take you for a ride.

Sole traders typically don’t have the due diligence capacities of larger companies and are therefore at higher risk of getting burnt. You may be forced to wind up, lose your business and be left with a mountain of personal debt. The stakes are high and the consequences are personal.

CreditorWatch data helps sole traders strengthen due diligence and protect cash flow

Securing cash flow is the key to protecting yourself and your business.

Do you understand the credit risk of the entities you’re doing business with? How likely are they to default or become insolvent? What are the potential risks that they might bring to your business?

CreditorWatch empowers sole traders and individuals with the credit risk management capabilities of large corporations. We are the most used credit bureau in Australia, with more than 55,000 customers giving us access to 11 million trade lines and 35,000 unique payment defaults annually.

We utilise 50+ public and private data sources and collect financial information from entities of all sizes across all states and industries. With data that can’t be obtained from anywhere else – we are the only credit bureau to report on ATO tax debt default data – we offer the most comprehensive view of an entity’s credit risk.

CreditorWatch helps sole traders assess the creditworthiness and financial health of any commercial entity, including:

• Customers
• Suppliers
• Business partners
• Stakeholders
• Investors
• Personal or directors’ guarantees

CreditorWatch gives individuals the power to take control of their due diligence processes. Whether you’re working with a few key customers or thousands of companies, we help you make accurate data-driven decisions, protect your cash flow and avoid bad debt.

Assess creditworthiness of trading partners

Sole traders can conduct unlimited credit searches at a fixed cost. Our credit reports provide exclusive insights about your trading partners, revealing valuable information about their financial health and credit risk.

They enable you to validate company details such as business lifespan, company status, addresses, director and shareholder details. You will also be able to avoid risky entities by identifying payment defaults, court actions, mercantile enquiries, administration appointments, credit enquiries, cross directorships, phoenix activity and more.

Simply use your dashboard to access interactive and easy-to-read credit reports about potential and existing trading partners.

Understand and mitigate credit risk

RiskScore enables sole traders to accurately assess a business’s creditworthiness and predict their likelihood of default in the next 12 months. It is the most predictive credit rating system in the market; using exclusive tradeline behavioural data, business demographic and geo-risk data and traditional credit risk drivers to create a granular risk profile of entities and industries.

RiskScore ranks entities based on their riskiness with one of 14 credit ratings (from A1 to F) and a numerical score from 0-850. The higher the score, the lower the risk. It helps you accurately assess creditworthiness and analyse risks associated with trading partners to make confident data-driven decisions.

Stay vigilant and identify warning signs

Businesses are constantly changing and multiple factors could affect an entity’s ability to pay on time. Get an accurate picture of your trading partners’ financial health with 24/7 monitoring and real-time alerts on adverse changes. By staying on top of your debtors, you can instantly identify high-risk events as soon as they occur and act proactively to mitigate risk.

Reveal payment trends and avoid slow paying businesses

CreditorWatch has access to exclusive trade payment data and provides the most accurate picture of how a market is getting paid.

Payment Predictor reveals a company’s payment history and compares it to the industry average. It allows sole traders to analyse payment trends, identify deteriorating payment behaviour and detect high-risk debtors.

Using these insights, you can avoid slow paying businesses, manage credit limits for new customers, prioritise collections and adjust payment terms for existing debtors.

Protect your security interests

If you provide goods or services on credit, what happens when your customer becomes insolvent? What happens if a debtor enters administration with your goods on hand or with outstanding debt? Are you able to reclaim your losses?

Protect your assets with the Personal Property Securities Register (PPSR) to mitigate risk exposure and prevent bad debt. By registering on the PPSR, you become a secured creditor and gain the legal right to get your goods back if your debtor becomes insolvent. A PPSR registration may even prioritise sole traders before banks when it comes to recovering debt.

Unfortunately, the PPSR is notoriously complicated to navigate. A single error can void your entire registration. PPSRLogic is our award-winning platform which simplifies the way you create, manage and renew PPSR registrations. It helps you increase compliance and accuracy to ensure complete protection on the PPSR. It is an effective and affordable solution for sole traders.

Get paid faster and prevent bad debt

Debt collection is a time-intensive and painful process. You need to be persistent while trying to preserve customer relationships. This can be especially difficult for sole traders, who are often their customers’ only point of contact.

CreditorWatch’s debt collection tools and templates help sole traders expedite payments. These tools help you streamline your accounts receivables, strengthen payment requests and avoid late payments. Generate letter templates for every stage of the collections process to communicate your trading terms and maintain a professional rapport with your customers. You may even attach CreditorWatch’s logo on your invoices and statements for a powerful third-party endorsement, which has been proven to increase chances of receiving payment.

Integrate with your accounting system

CreditorWatch seamlessly integrates with accounting packages like Xero and MYOB. By linking your accounting package with CreditorWatch, you can easily identify risky debtors in your ledger and enhance your credit reports with additional data. This integration also automates credit checks for new customers, ensuring you always know exactly who you’re dealing with.

Level up on your due diligence

It is important to increase due diligence procedures for bigger contracts or to investigate major clients, suppliers, business partners and investors. Here are some ways to level up on your due diligence:

• Director Due Diligence – Identify adverse director information, cross directorships, bankruptcy data and potential illegal phoenix activity
• Know Your Customer (KYC) – Verify the identities of your customers and assess potential criminal risks
• Ultimate Beneficial Owner (UBO) Reports – Identify non-individual customers and the risks associated with their beneficial owners
• Financial Risk Assessments – Get an in-depth analysis of an entity’s financial performance, financial risk, expert predictions and recommendations

Gain a competitive advantage with CreditorWatch

CreditorWatch is an all-in-one credit management solution which helps sole traders strengthen due diligence, mitigate credit risk and secure cash flow to protect themselves.

Save time and money with CreditorWatch and gain the confidence to grow your business.

For a personalised demo or a free trial, please get in touch with us here or call 1300 50 13 12.