How do you protect your business from commercial invoices going unpaid?
Credit insurance provides your business with protection against corporate clients failing to pay their debts, whether that non-payment is due to your customer becoming insolvent or because they simply fail to pay within an agreed credit period.
It works in two ways. Firstly, it helps you identify which companies you should extend credit facilities to and secondly, to make sure you’re not damaged financially in the event of non-payment.
While credit insurance does underwrite losses from non-payment of commercial debt, the goal is to help your business avoid such losses and grow profitability.
The key is having the financial information about companies, sectors and economic trends before extending credit terms, therefore helping to inform credit decisions and minimise losses.
Unpaid invoices can represent up to 35 percent of a company’s assets. Many of these unpaid invoices could be avoided with more knowledge of your customers’ solvency.
More in-depth knowledge helps you pick the right customers, markets, and credit limits in order to avoid and minimise non-payment. As a result, you have greater confidence in extending additional credit to current customers and pursuing new, larger customers that you might otherwise deem too risky.
If your customers fail to pay, you receive the cash for the insured invoices and the insurer takes care of the debt collection.
Any company selling on open account terms can benefit from credit insurance, though it tends to be companies with turnover of £250k+.
Credit Insurance Example
If a company’s profit margin is five percent and one of its customers defaults on a debt of £100,000, the company will have to produce additional sales of £2,000,000 to make up for the lost profits.
More importantly, the lost cash flow could be devastating. Non-payment weakens your company and lowers its investment capacity.
A trade credit insurance policy helps manage your account receivables and compensates you in the event of non-payment.
Credit insurance does more than just ensure your invoices are paid. It can help your business succeed by providing the following benefits:
Safer business growth
Credit insurance gives you the confidence to expand your sales to new and existing customers and markets. It also enables you to sell on open account terms, which can be a major competitive advantage, especially for exporters.
Thorough customer insights
Our knowledge helps you pick the right customers and make the best decisions for your business. We tell you everything you need to know about your customers, your potential customers and your marketplace to grow with confidence. Our risk information database is a valuable support to your in-house credit management.
Optimised risk management
With a credit insurance policy, you can better control and protect against bad-debt losses. You can minimise your risk when exploring and developing new markets. Credit insurance also gives you the reassurance that your invoices will be paid even if your customers default, which is critical to protecting your cashflows.
Better borrowing and financing options
Your business can secure better borrowing terms with the security that credit insurance provides. In some cases, your bank or lender may actually require credit insurance in order to qualify for a loan.
Credit insurance Q &A
Who uses credit insurance?
The sensible ones! Credit insurance is suited to all manner of companies, trading nationally or internationally and in all sectors from manufacturing to services. In terms of size they tend to be firms with turnovers from £250,000.
When and why would you consider using credit insurance?
On average, companies are estimated to have 40% of their current assets in the form of trade debtors. (For some companies this figure can be much higher).
Research has shown consistently that companies are unable to predict the vast majority of failures to which they are exposed.
It is estimated that up to 50% of all failures concern customers that were previously considered to be both long standing and prompt paying. It is a sobering thought that even the customer you thought you knew best of all could inadvertently end up being your downfall.
A further reason why businesses should consider using Credit Insurance is because a bad debt often causes a company to reduce the amount of credit it extends to its customers. Again in simple terms, it is easy to see how this potentially exposes that business to its competitors, leaving it in a potentially much weaker competitive position.
How does it work?
How it works is this: You ask the credit insurer for a credit limit on each of the customers with whom you trade above an agreed level. Below this level – referred to as your Discretionary Limit – you do not need to ask for a credit limit. Instead, you can use your own sources of financial status information and trading experience to justify the trade credit which you extend. Provided you trade within the set parameters and abide by the terms and conditions of the policy (which we shall come to in a moment), you will be covered (up to the limit of cover agreed) if one of your customers should fail.
As regards the level of cover available through a credit insurance policy, typically 80%-90% indemnity applies, depending on the type of solution you choose. Credit insurers are generally flexible insofar as your choice of which customers to cover. Some companies may wish only to cover their top customers or against ‘exceptional’ losses. (There are specific policy types available that allow you to do just this).
As always, get in touch if you’d like to understand more about how credit insurance can help your business.
LIFT-Insurance is an appointed representative of LIFT-Financial.