Who uses credit insurance?
When asked who uses credit insurance?, the reply is always the sensible ones! This type of insurance is suited to all manner of companies, regardless of whether they are trading nationally or internationally. It also applies in all sectors, from manufacturing to services. In terms of size they tend to be firms with turnovers from £250,000 through to the largest multinationals.
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.
Indeed 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 sobering to think that even the customer you thought you knew best of all could inadvertently end up being your downfall.
The cost of bad debt can be very significant. For example, if a company is operating on a 5% profit margin, a £10,000 bad debt would require £200,000 of additional sales to compensate for the lost ground. Double the debt and it is easy to see why businesses can be brought to the brink of collapse. Unless of course you are covered by credit insurance.
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. It’s easy to see how this potentially exposes that business to its competitors, leaving it in a potentially much weaker competitive position.
How can credit insurance improve my business?
Many benefits of credit insurance have a positive impact on a business, especially in relation to the wider subject of ‘credit management’.
For example, credit insurance provides an early warning that a customer is in financial difficulty. This allows a company time to withdraw from the relationship on a structured basis, reducing exposure gradually.
Another positive aspect of credit insurance is that it assists you with targeting your sales effort, focusing on profitable buyers and markets, and avoiding financially weak customers or politically unstable export territories. It is also positively impacts on your balance sheet by reducing a company’s bad debt provision, thereby releasing tied-up capital that can be invested elsewhere.
Trade credit insurance policies help out when your customer pays late (sometimes referred to as protracted default) or goes insolvent. The trade credit insurance policy acts like a safety net protecting you from suffering financial loss because of your customer’s failure to pay. Further, many firms take advantage of the trade credit insurance cover and increase their turnover where increased limits allow them to increase the level of credit available to certain customers. For example, where a firm previously set a £10,000 credit limit to protect itself and limited sales to this, a £20,000 limit would allow them to double their turnover for this client and avoid possible competition.
Security, funding and other benefits of holding credit insurance
The ‘security’ which credit insurance provides, gives you the confidence to tackle new markets and take-on new customers, safe in the knowledge that if anything happens beyond your control, then you’re covered. It can also be used to provide greater security – in essence a guarantee – to a lender for trade or export finance, and thereby provide greater access to finance.
Actually holding trade credit insurance can have its advantages with banks and other credit providers (including suppliers) as your cash-flow tends to be protected. Further, by letting customers know that you have trade credit insurance, you can influence those same customers to settle your invoices sooner – failure to do so will damage their own credit rating.
Furthermore, being credit insured offers you representation at meetings of creditors and free legal and practical advice on enforcing your Retention of Title rights over goods supplied but not paid for. It can also provide access to high quality and more often than not fairly up to date credit opinions on companies both in the UK and internationally. Finally, bank lenders may be positively influenced if your debtors are insured.
The information above highlights why Credit Insurance is so important and quickly becoming a “must have” insurance cover. Contact us today to receive a Credit Insurance Quotation