Would your business be able to cope if one – or more – of your debtors became insolvent? In this article, we look at the issue of trade credit insurance and how it can help to protect your business when the worst happens. What is trade credit insurance? Trade credit insurance – also known as ‘credit insurance’ – offers protection against bad debts and late payment; usually defined as debts that have been outstanding for 90 days after the due date. In the UK, the majority of trade credit insurance is for cover against bad debts due to insolvency. In addition to safeguarding your business from late payment, trade credit insurance may also have the added benefit of improving credit-worthiness. Export trade credit insurance Underwriters can offer policies specifically for insuring against bad debts and late payment from overseas customers. Some policies will cover domestic and overseas credit risks. The cost of exports trade credit insurance will not be much greater than for domestic trade credit insurance in the case of the more stable countries (like France and the US), but may be more expensive in other countries. The Government recently extended its short-term credit insurance scheme to smaller exporters. How trade credit insurance works Trade credit insurance generally covers between 75% and 95% of debt. Insurers tend to tailor their policies to suit the needs of the business. Some policies will insure all debtors, while others may be restricted to a selection. If a credit insurer refuses to insure credit for some of your customers, this may prove a useful indicator about their ability to pay. Credit insurers will expect that your internal credit management policies are robust and being followed to minimise the extent of risk and some may require that their own credit checking systems are used before issuing credit insurance. The efficiency of a business’s credit management system can be a factor in influencing the cost of the premium – just another reason to ensure that you have good credit control procedures in place. While credit insurance can help to reduce the financial impact if your customers default, being aware of which of your customers may be at risk of insolvency can also help to reduce your exposure. Learn how to monitor new and existing customers. How to access trade credit insurance Trade credit insurance is a fairly specialised area of insurance. Details of firms can be obtained from the Institute of Credit Management or the British Insurance and Investment Brokers’ Association. We offer Forum members a range of credit control services under our Finance Director business solution, including: FREE business monitoring Discounted debt recovery services Discounted credit reports An online guide to credit control. For more information on these issues or for guidance and advice on any finance issue, call our helpline today on 0845 130 1722.
It is a sad fact that the economic downturn has increased the risk of company insolvencies and receivership. While credit insurance can help to reduce the financial impact if your customers default, being aware of which of your customers may be at risk can help to reduce your exposure.