Credit insurance can reduce businesses’ exposure to unnecessary trading risks. Offices and equipment are often the first assets businesses insure. However, one of the largest assets on the balance sheet, trade receivables, is commonly left uninsured and vulnerable to risk.
The average business receivables asset makes up about 30 to 40 per cent of the ledger, meaning that, without appropriate credit insurance, the business is at high risk.
Regardless of how well a business knows its market and buyers, insolvency and payment default are significant commercial risks that can affect cash flow, profitability and confidence.
Yet many industries have been slow to understand the importance of credit insurance and the benefits it offers.
Taking out cover can make the difference between continuing to operate or closing down if customers fail to pay.
“Businesses without credit insurance have or no little protection against bad debt and damage to their cash flow.”
Businesses often make the mistake of relying on long standing customer relationships for assurance against default risks. However, it is impossible to predict the future when trading on credit terms, and risking cash flow based on gut-feelings can significantly damage a business.
There are many reasons why a customer may be unable to pay, and many are beyond their control, including political intervention, currency exchange issues, terrorist attacks, or natural disasters. Even if the buyer has been dealt with for many years, or they are a well-known enterprise, the business can never be in a position to predict the future and gamble on it.
Being credit insured safeguards the company against risks that could otherwise cripple a business and damage relationships with other trading partners.
A major customer going into insolvency could paralyse a business without credit insurance to cover for the unexpected losses. Having credit insurance guarantees the business is covered for unpaid invoices, regardless of whether they are the customers’ fault or not.
For small businesses in particular, credit insurance cover can provide a valuable extension to the company’s credit management practices, and help ensure the business’ revenue and bottom line are protected.
When small businesses fail to perform credit checks on all of their buyers, they don’t have visibility into their customers’ financial stability and can approve high risk customers as trading partners.
A credit insurance provider can help mitigate the risk of unreliable customers by providing ongoing advice on the financial risks of trading partners.
Valuable insights and knowledge they can provide about customers, such as how they manage their accounts receivable, lets organisations make better-informed trading decisions.
A good trade credit insurer will add value to businesses of all sizes, have a thorough understanding of the business sector, and act as the business’s eyes and ears on the ground. They can check that prospective customers are stable, creditworthy and have a reputation that meets the required standards.
Credit insurance providers have access to live data on millions of businesses which helps the business be better informed to make strategic decisions.
Businesses covered by credit insurance are able to focus on sales and business growth, while reducing any negative impact that non-payment might have on their bottom line. This gives the organisation a clear advantage over competitors, protects profits, and provides peace of mind.
Credit insurance policies can cover domestic businesses, international businesses or both against the risk of non-payment if a buyer becomes insolvent or is otherwise unable, or refuses, to pay. They generally cover 90 per cent of invoice value (less policy excess).
Contrary to the beliefs of many decision makers, credit insurance is affordable for organisations because the cost is calculated on business turnover.
Mark Hoppe is the managing director, Australia and New Zealand, of Atradius.