Understanding Credit Insurance: A Guide for Businesses

Credit Insurance is becoming increasingly important, through creating the right payment terms with your customers is critical for survival and growth in the market. Without protection, it’s not always within your control to ensure invoices are paid on time even with a contract. Extra measures should be in place to ensure profitability, allowing your business to have all its resources to take the next steps. 

To reiterate how important of an issue this can be for businesses over 40% of business-to-business (B2B) invoices are unpaid past their due date. This is where credit insurance comes in and saves the day and acts as protection. 

What Is Credit Insurance?

Credit insurance provides a security blanket for businesses against non-payment or short-term finances as mentioned above such as invoices from your customers. Insurance kicks in after the due date to support and prevent any problems with cash flow. 

This can give your business the confidence to grow and extend credit to new customers to become more competitive. As a part of your risk analysis process, this helps give a more detailed profile of your customers this facilitates an understanding of the market. 

With the risk of customer insolvency removed this looks more favourable to your business and can allow you to negotiate more favourable terms with banks and or financial institutions. 

Who Would Benefit From Credit Insurance?

To figure out if this is something your business would benefit from, first ask yourself these questions:

1. Do you sell goods or services?
2. If you do, is there a credit term in place? Or something you have been considering?
3. Would you like to have reliable cash flow?
4. Are your sales concentrated on a small number of customers? 
5. Would unpaid invoices have an impact on your business’s performance?
6. Is expanding your business something you are aiming towards

This would be beneficial to any business that is exposing themselves to business-to-business credit, Sales of goods or services on account credit terms would massively benefit from credit insurance as it eliminates a huge risk and stress factor.

There is no limit or requirements to who can apply for credit insurance, whether you’re a small or large business there is a plan that will support your business from bad debt. 

What Are The Benefits Of Credit Insurance?

There are several benefits mentioned above to why businesses should adopt credit insurance, and as a cost-effective method, it appears to only drive a business upward while facing this time-consuming.

1. Protection From Bad Dept.
2. Enhance Working Captial.
3. Time Saving.
4. Cost-Effective Security Provision.
5. Facilities Access To Finance. 
6. Embeds Credit Management Disciplines. 
7. Empowers Business Growth. 
8. Supports Mergers and Acquisitions.

Overall, it prevents bad debt and allows you to make competitive business decisions without the risk of insolvency. Here are some real-life impacts of what credit insurance can prevent:

• According to Pay. uk, small and medium-sized enterprises (SME), late payment debt stood at £23.4 billion in 2019, with 54% of SMEs.
• The UK Small Business Commissioner reported that 20% have experienced cash flow problems due to overdue payments.

How Does Credit Insurance Work?

Depending on the policy you choose for your business, the first steps are as simple as passing over information about your business and customers including your top buyers and your loss history this will help establish credit limits and trade credit terms, such as a maximum invoicing period e.g., 30 days and your premium. 

If your customer exceeds their agreed invoice contract or more without consultation or communication of an extension you easily notify credit insurance brokers who will step in and collect the debts on your behalf This not only saves time and energy reaching out to everyone in the hope of payment or a response, it allows your business to claim on its insurance and allow things to run smoothly. 

No matter on the business or policy it is always subject to adjustments of the credit limits subject to what the credit insurance firm believes is right to provide security and avoid potential losses. 

Types Of Trade Credit Insurance?

• Whole Turnover Cover 

A type of insurance that covers all or substantial parts of a vendor’s sale over a short-term trade credit.

• Country Risk Policies 

Protection that extends credit to customers that are located within a particular country, can be useful for businesses that have customers at high risk of political or economic instability 

• Portfolio Policies 

This credit extends a range of your customers. This type of policy can benefit businesses that have a diverse customer base or a range with a low-risk default. 

• Selective Default

This provides cover for businesses that extend credit to a single customer, This can be beneficial if a business has a large exposure to a single customer with a large risk of default 

How Much Does Credit Insurance Cost?

This is completely dependent on the type of coverage you need and how much you’d like to insure your business up to. 

For example, SME’s cost might be a alot less compared to a large enterprise due to the mass of customers and revenue coming in on a monthly basis. The premium is calculated as a percentage of the total amount of revenue starting from 0.15%, this can sometimes work out to be much higher.