Starting a business has never been for the faint-hearted. However, conditions on British high streets and business parks are toughest since the 2008-9 credit crunch. Company insolvencies were up 4% in 2017, with the high profile demise of Carillion following in early 2018. In the first quarter of 2018 44 new credit insurance claims were made every day. During this time £54 million was paid out to UK businesses against unpaid debts.
Why should you take out credit insurance?
Trade credit insurance provides cover for you when customers do not pay their debts due to insolvency or bankruptcy, or pay within your agreed payment terms.
First and foremost, you should protect yourself against non-payment. If a customer is declared insolvent, this cover will typically pay out 90% of what you are owed. There are some other benefits too. Banks often lend greater levels of capital to businesses who have credit insurance in place. By reducing your risks of non-payment, you also reduce their risk too. They may reward you for this.
You can also expand your new business opportunities with increased peace of mind when you have credit insurance. You can try exporting overseas, selling more to your existing customers, or entering an entirely new market; all safe in the knowledge that you are insured should a new customer default on a payment you will be able to reclaim funds.
When you have credit insurance in place it will allow you to make informed decisions on offering credit levels to customers, both existing and prospective. Credit insurers can help you manage risk by informing you of any changes in circumstances that might affect your customers and their ability to pay for your goods or services. They carry out this monitoring through a number of ways. Insurers may have information supplied by other policyholders that sell to the same customer. They can make visits to the customer to build a picture of their financial health, alongside public records and financial statements.
Credit insurance is particularly critical for any business that manufactures a physical product or creates their goods from other supplied parts. Even when a customer fails to pay you, you still need to pay your suppliers. Not only do you lose out of the payment for what you have manufactured, you must then generate additional sales to cover the cost of the materials.
For example, you win a new contract for £100,000 requiring £80,000 worth of materials. You have a 20% profit margin. The customer is declared insolvent after you have finished preparing the goods. You still owe your supply chain £80,000. You will need to generate an additional four sales of the same value and margin to simply cover the bill from your missing payment. If you have credit insurance in place, you don’t have to worry.
Credit insurance is available for products and services due within 12 months. Cover can be obtained for individual customer accounts or for your entire portfolio.