As a business owner, you are no doubt familiar with the concept of trade credit which is a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date.
Problems arise if you extend credit terms to a customer who is then unable to pay you or if their business fails completely, leaving you with bad debt. Allianz (one of Europe’s largest insurers) reports that if a customer goes into liquidation, 76% of the time the supplier will get nothing [1]. Recent high-profile insolvencies include Henry Construction, Wilko and the Buckingham Group. Even a default on payment can negatively impact creditors.
You can buy protection for your business against the failure of customers to pay their trade credit debts. This is called Credit Insurance. In this article, we will explain what it is and how it can help protect your cash flow.
What is Credit Insurance?
Credit Insurance safeguards against the failure of your customers to pay their trade credit debts. It is an insurance policy against the risk of non-payment of goods and services (trade receivables). Credit Insurance covers the risk of non-payment when a business offers trade credit to a customer. It is an important risk management tool that enables companies of all sizes to trade with confidence at home or abroad.
Importance of Credit Insurance in the current economic climate.
Businesses currently face numerous challenges, one of which is the uncertainty of when, or even if, customers will settle their invoices. The impact of the Covid-19 pandemic has raised legitimate fears of an increase in bad debts.
As the economic landscape continues to shift, some companies find themselves compelled to prioritise self-preservation, opting to keep cash rather than meeting their financial obligations to suppliers.
Credit Insurance serves as a vital safeguard to protect cash flow from the damage of overdue payments and potential bad debts. It also becomes a proactive measure to strengthen businesses against the adverse impacts of financial uncertainty.
Why most businesses need Credit Insurance
Businesses use trade credit to manage and improve their cash-flow. It simply means that a supplier extends business credit terms (typically 30 days), giving the customer extra time to pay for the goods or services provided.
Businesses negotiate trade credit terms based on the customer’s perceived creditworthiness, but problems sometimes arise because a supplier is often the last to know when a customer’s business is in financial difficulty.
Credit Insurance serves as a protective shield for domestic and international trade, mitigating the risk of non-payment by providing insurance cover against such uncertainties.
If you purchase raw materials, stock or other goods from suppliers in bulk and are required to pay a significant deposit prior to arrival of the goods in order to get the most favourable terms, Credit Insurance can be arranged to protect you should your supplier fail before fulfilling your order.
With Credit Insurance in place, your business gains the confidence to engage in transactions, both domestically and internationally, secure in the knowledge that your cash flow is safeguarded in the event of a customer’s inability to settle an invoice. Credit insurance can give you the ability to extend favourable credit terms to your customers, building stronger relationships and potentially attracting new customers.
Risks associated with not having Credit Insurance
Could your customers pose the biggest threat to your business? It is not something many business owners want to think about, but the reality is that you might not have full visibility of your customer’s financial situation and that lack of information could leave you with a bad debt. What if one of your biggest customers stopped paying you for any reason, what impact would that have on your business?
In a year, the average company will lose more than three of its active customers because of financial distress, insolvency, administration, or receivership. A £1.5m turnover business earning a 5% net profit margin would have to increase its turnover by 30% to recoup a bad debt of £22,500[1].
It is worth thinking of how disastrous a bad debt of £50,000 would be on your business and then comparing that to the cost of protecting the risk with insurance. It is worth spending time seriously considering Credit Insurance as an option to protect your business.
Types of Credit Insurance
There are a variety of types of Credit Insurance. The most common being whole turnover cover, through critical customer cover, single risk cover to export trade credit insurance. What Atom does is provide clients with a package of risk management services which not only cover their trade credit risk but also offer them the support of prevention services, recovery tools and compensation for uncollected debts. This means clients can get up-to-date financial information on their customers, helping them to set appropriate credit limits, review existing relationships and reduce their exposure to potential bad debt. This is combined with help to recover unpaid debt and in the case of non-payment, the claim is still paid. This approach gives clients information, protection, and collection of money due.
How much does Credit Insurance cost?
The cost of Credit Insurance will vary as it will be based on numerous factors including trading history, turnover, business sector and the customers that cover is required for. The premium will take these factors into account and is usually calculated as a percentage of the insurable turnover.
What information is needed to get a quote?
Getting a quote is usually straight forward. We will need to know about your turnover, customer profile, the percentage of your turnover which is exports and the trade sector(s) you operate in. We will also ask about your customer base, your credit management experience, credit control procedures and previous bad debt history, so we can get as clear a picture of your business as possible when negotiating with insurers.
How to get a quote
If you have the information to hand, then give us a call at 01823 442214 and one of our team will be able to help you.
Why Atom Insurance Brokers
Buying business insurance can be complicated and stressful. People buy insurance in the hope that they will never need to use it, but there is a growing chance that it will be needed. When they do, they need to be confident that it will provide sufficient cover and that claims will be settled quickly and in full.
Everything we do is about making buying insurance as easy as possible, from the very first conversation with us we will take the time to understand your business, the risks you face, and your attitude to risk and insurance.
This will enable us to build you an insurance program that gives you the right combination of cover and premium to protect your business, as well as make sure you have all the expert help you need should disaster strike and you need to make a claim.
You can be confident that you have a partner you can trust to help you manage your risk, ensure your business is protected and keep your premiums under control.
Summary – What to do if you need help with trade credit risks.
With the economy on a knife edge more of our clients are concerned with customers failing and consequently them being left owed for work completed or goods supplied, a figure supported by the Association of British Insurers (ABI) who have seen Credit Insurance payouts up 23% to protect UK businesses against bad debts [2].
Historically Credit Insurance has been thought of as complex and expensive but with the increase in demand we have seen an increase in appetite from insurers providing a wider range of support for businesses concerned about their credit risk. With this simplified approach, arranging Credit insurance is easier than ever.
In summary, there are multiple benefits of having Credit Insurance, from the ability to monitor a customer’s financial position, assistance with collections and securing trade finance to the avoidance and reduction of bad debt resulting in better trading relationships with customers. These benefits go beyond the obvious bad debt compensation and help your business become stronger and more resilient in tough trading conditions.
If you would like to find out more, get in touch with us at 01823 442214.
Sources:
[1] Allianz Trade Credit Broker Sales Kit
[2] https://www.abi.org.uk/news/news-articles/2023/10/trade-credit-insurance-payouts/