In business, there is only one thing that is really important: getting paid. The only 'good' client - so the phrase has it - is a paying client.
There are, however, a whole host of reasons for non-payment, some simple, some more complex. Whatever the reasons, and wherever the fault lies, a bad debt could place your business in serious jeopardy. The business world as we know is littered with incidences of spectacular bad debts bringing companies to their knees.
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 a sobering thought that even the customer you thought you knew best of all could inadvertently end up being your downfall.
Consider a balance sheet. Whilst most firms insure their physical assets (buildings, stock, and contents), surprisingly few firms consider protecting their other assets - their invoiced debtors - on average 40% of their assets.
A simple insurance policy can make all the difference. This is where Credit Insurance comes in.
What is Credit Insurance?
Credit insurance provides your business with protection against the failure of your customer to pay their trade credit debts - i.e. money that is rightfully yours. Such a debt can arise as a result of your customer becoming insolvent or because your customer simply fails to pay within an agreed period.
Credit insurance is suited to all manner of companies, regardless of whether they are trading nationally or internationally, and in all sectors from manufacturing to services. In terms of size they tend to be firms with turnovers from £250,000 through to the turnovers of the largest multinationals.
As well as 'commercial' risk for domestic customers, 'export' credit insurance can also protect against 'political' risk for those trading abroad. Examples include war or civil war, cancellation of the contract by the government of your customer's country, or governmental regulations which prevent the export or import of goods.
Generally 90% of the debt is insured - the trade credit insurance policy works by attributing individual credit limits to each customer. The limits are pre-set, and you can trade within the credit limit throughout the year without further reference to the insurer. You can request an increase in the credit limit at any time to suit your requirements, subject to the customer's credit performance being adequate.
Why do I need it?
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, allowing 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.
Holding trade credit insurance can have its advantages with banks and other credit providers (including suppliers) as cash-flow tends is seen to be protected. Further, by letting customers know that credit insurance is in place, a firm can influence those same customers to settle invoices sooner - failure to do so will damage the customer's credit rating as non-payment situations are reported to the insurer.