Credit insurance provides protection in the event of non-payment for provided goods or services.
Non-payment for services can happen at any time, usually deriding from third-party insolvencies, bankruptcies, negligence or disagreements. If a business does not have the funds to pay its debts, this can be known as a protracted default. Whether it’s because of a default or negligence, businesses always have to accept the risk of non-payment when working with buyers. Non-payment will heavily impact a company’s cash flow, compounding debts and impacting credit which affects growth. Companies should look to protect themselves from this eventuality.
Exporting internationally comes with an even higher degree of risk – which is why credit insurance is highly sought after for companies hoping to do business within unfamiliar countries or regions. War, restrictions, tariffs or other political risks can all affect the likelihood of a non-payment claim.
Any company which is unsure of its business relationships, dealings or the reputation of its buyers should consider credit insurance. Companies who have dealt with the same customer for years may consider themselves safe from non-payment, when in fact they are most at risk. Too much trust in a customer can result in negligence or oversights, leading to bad debt and poor credit. Protect your business’s balance sheet and credit score with comprehensive credit insurance.
What are the benefits of credit insurance?
Bad debt protection
After a period of heavy losses, businesses can have increasingly worse debt. Credit insurance is likely to reduce your debt provision. Debtors can sometimes represent as high as 90% of a business’s assets, therefore covering this risk is paramount.
Improve financial security
Security is valued by banks. Credit insurance is often used to demonstrate to banks or lenders that finances are secure, and that the risks of trading internationally have been controlled.
Improve growth
Because cash is returned to businesses promptly, companies are able to offer more competitive terms. Credit is important for lending and borrowing, therefore benefiting stable growth projections.
Risk aversion
By following the principles of credit insurance and doing their due diligence, companies will naturally steer away from bad risks. Potential trading partners in financial difficulties or in other countries need to be thoroughly assessed in order to reduce exposure.
Protection over budget and business plans
Credit insurance will ensure that bad debt will not upset the business’s financial position. Knowledge is important to build confidence and help safeguard that the business will not go over budget.
Guidance from credit insurers to improve credit decisions
Credit insurers have up to date information known only to them, this ensures their guidance is the best available.
What is included in a credit insurance policy?
A credit insurance policy will cover buyer insolvency and protracted default which occurs when a buyer fails to pay an undisputed amount. The cover commences upon the dispatch of goods – however for bespoke goods, pre-credit risk cover can be acquired, which provides cover during the period of work in process.
The duration of the policy is typically 12 months, but two year policies are available. Longer term arrangements will depend upon claims experience and market conditions. Only specialist brokers can offer the best terms.
The scope of the cover and the premium will largely be affected by the attached risk, excess and the style of deductibles. Companies willing to accept larger risks may want to consider an ‘aggregate first loss’ where a predetermined value of insured losses is agreed before any claim is paid.
Be mindful, insurers will state the maximum amount they will pay out in claims in any one period – This differs between insurers and is known as the IML (maximum liability limit).
A sum insured or credit limit must be established for each insured buyer. The credit limit should therefore be sufficient to cover the exposure of the company. Valuations for the credit limit are usually valid for 6 to 12 months, and will need to remain updated.
Insurers will require debts to be pursued promptly, and will also need to be informed of any overdue debts, typically 14-30 days post-expiry. Many insurers even offer the collection services of a third partner. Confirmation of debt, and all documentation will need to be gathered and retained in the event of any claim or insolvency cases.
What types of credit insurance are available?
There are currently a number of different credit insurance products available on the market:
Wholeturnover – This is the most popular and will provide cover for the full turnover of a business. This cover comes with strong stipulations, including excluding sales to certain buyers and large deductibles.
Major Buyer – This cover focuses on the principal customers only. Customers need to be accepted to be included within the cover, and cover is delivered only to buyers above a threshold.
Excess of loss – This type of cover is suitable for very large businesses. Usually combined with high discretionary limits, this cover gives the policyholder freedom to operate their own credit management procedures. Before any claims are paid, an annual discretionary limit must be met, therefore excluding small debts.
Single buyer – This cover only focusses on one buyer.
There are also Top Up covers and Gap Fill covers that are available to assist underinsured parties.
The benefits of using a specialist credit insurance broker
- Specialist brokers offer access across the market, enabling the most competitive terms and rates.
- Brokers will help to tailor a structure suitable to your needs.
- Brokers can report on the credit limits available and how to measure your buyers
- Broker will provide training and guidance as well as technical advice.
- Brokers ensure claims are settled quickly and efficiently, delivering the best outcome.
- Brokers arrange regular review meetings, ensuring your needs are reviewed and met in advance of renewal. They act to avoid the dangers of underinsurance and deliver adequate tailored cover.
How to implement control measures to reduce your credit risk?
All companies need to understand their credit risk, especially those that conduct business with buyers oversees.
The next step for businesses looking to improve their credit risk is to review their client base. Assess the risk of any of them liquidating, and the healthiness of their cash flow. If your business has principal buyers, investigate their leadership team and their balance sheet, as well as their growth over the past few years. For new buyers, investigate the seriousness and financial viability of the relationship. Make sure you do your due diligence and investigations to measure the risk.
Business owners should explore the potential of how trade credit insurance can financially support you. Credit insurance should only be purchased through a specialist broker in order to be certain of the best terms.
There are many benefits of utilising a specialist broker, none more impactful than the expert guidance they provide. Contact Romero Insurance for more information on what form of credit insurance would be suitable for your business. Arrange a confidential review to allow us to better understand the needs of your business.