Credit Insurance

TRADE CREDIT INSURANCE - DOMESTIC & EXPORT

Historically many businesses considered trade credit insurance as a luxury. Today companies are recognising how trade credit insurance can offer invaluable protection against invoiced clients – particularly in the current economic environment.

"In the course of a year the average company will lose more than three of its active customers because of financial distress, insolvency, administration or receivership." - Credit Management Research Centre

"Over half of all UK insolvencies involve established companies with a previous record of prompt payment." - Association of Business Recovery Professionals

"Couldn't happen to you, or could it? You see, over 50% of all UK insolvencies involve customers who were previously prompt payers. Add to this the possibility that you may have up to 60% of your assets linked to your sales ledger and you start to see the potential problem. What's more, if you are an average company, each year you're likley to lose more than three of your active customers because of financial distress, insolvency, administration or receivership." - Credit Management Research Centre

"It's a scarey thought but here's another fact for you. If a customer of yours goes into liquidation, in the vast majority of cases, you won't get paid a thing... and if you are lucky enough to get something, as a trade creditor it's usually around 5p in the pound." - Association of Business Recovery Professionals

Ask yourself these questions -

• Right now, how much money is outstanding on your sales ledger?
• How much do you know about your customers' ability to pay?
• How badly would your business suffer if some of your largest customers failed to make those crucial payments to you? Could your business even survive?

Trade credit insurance is available to cater for both insolvency of the debtor and for simple non-payment.

Rowlands and Hames has access to all major trade credit insurers including Euler Hermes, Atradius, Coface, QBE, HCC Credit in addition to other smaller providers and to certain providers in Lloyd's and the London Market only interested in large risks.

Introduction

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, however, 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.

Consider a Balance Sheet. Whilst most firms insure their physical assets (buildings, stock, contents), future income by way of business interruption insurance, and purchase liability insurance to protect against third party claims, far fewer consider protecting their debtors’ balance, often a significant asset.

A simple insurance policy can make all the difference. This is where Credit Insurance comes in.

Quotation Forms

We access all the major credit insurers including Euler Hermes, Coface, Atradius, QBE, HCC etc.

To obtain a quotation, complete the appropriate form below and and email to john@rowlands-hames.co.uk. Alternatively fax it to us on 01253 358481

Download our quotation form now - pdf version

or

Download our quotation form now - MS Excel version

and email the completed form to mail@rowlands-hames.co.uk

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 (i.e. going bust) or because your customer simply fails to pay within an agreed credit period.

The protection covers as standard goods sold and delivered but can be tailored to cover many other risks such as pre-despatch work-in-progress and binding contracts.

As well as ‘commercial’ risk, 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.

Credit insurance can indemnify you against a complete spectrum of perils such as inconvertibility, contract frustration, contract cancellation, and export and import restriction problems.

Credit Insurance - Background

If a business fails to collect money from invoiced debtors on time (or at all), the following effects are likely to happen:

a) Problems with cash flow - A business may find it difficult to pay their own debts, purchase essential materials and even pay staff wages!

b) Self-financing - A business may have to finance the loss or late payment of a debt from their own turnover. This may mean a business with a high profit margin may have to increase their turnover significantly to make up for even the smallest amount of money.

c) Reduced competitiveness - A business suffering from bad debts may have no choice but to reduce the amount of credit they offer making them less competitive.

d) Collection & legal costs - If a business decides to take action to recover debts, this can often result in collection fees or solicitor fees. Alternatively, if the business decides to recover the debt themselves, the process can be timely.

Generally, if you offer credit terms to your invoiced customers you will increase your sales (the problem is you will also potentially increase your bad debt).

Trade credit insurance is designed to cover, usually for twelve months, a supplier of goods or a service from bad debt arising out of an act of insolvency (see Insolvency section) and some trade credit insurance policies offer protracted default i.e. where they simply refuse to pay. All of your invoice based customers can be covered, or just your 'top' customers (definitely not just your worst customers!)

The trade credit insurance policy works by individual credit limits attributed to your customers. 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.

Trade Credit Insurance premiums may be paid in one payment but many insurers offer monthly payment, some interest free.

Many unforeseen and disruptive circumstances can appear in the world today. As we have seen of late, this is not confined to third world countries. War, political unrest, military coup d'état, fraud, and all the problems any business in the world can suffer makes export sales without trade credit insurance: business suicide.

Types of Credit Insurance

There are many types of trade credit insurance offered today, which are usually further tailored to the specific security needs of the business.

a) Whole Turnover cover (the most common solution) - This comprehensive credit insurance policy will cover the whole business. The trade credit insurance policy allows the business to offer credit up to a certain amount: anything above this figure must be agreed in advance by the insurance company. The premium paid is based on the turnover of the business.

b) Critical customer cover - This trade credit insurance policy allows a business to have insurance cover against a number of named customers (usually up to 10). Such customers may be under threat from insolvency, have a poor credit rating, or may be key customers. The business will be fully responsible for the remaining customers not covered by the credit insurance.

c) Specific risk cover - This trade credit insurance policy allows a business to have insurance against a single customer or a large contract. The premium paid is based on the contract value or the turnover of the customer over the policy period.

d) Export trade credit insurance - If a business trades outside of the UK, this policy can offer insurance against non-payment of overseas customers. This type of policy can also insure against a number of risks including political, social and economic instability, government intervention, insolvencies and defaults, currency issues and dis-honoured letters of credit.

Who uses credit insurance?

The sensible ones! 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.

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 a sobering thought 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. Again in simple terms, it is 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, 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.

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.

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; and generally provides 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.

How does it work?

How it works is this: You ask the credit insurer for a credit limit on each of the customers with whom you trade above an agreed level. Below this level – referred to as your Limit of Discretion or Discretionary Limit – you do not need to ask for a credit limit. Instead, you can use your own sources of financial status information and trading experience to justify the trade credit which you extend. Provided you trade within the set parameters and abide by the terms and conditions of the policy (which we shall come to in a moment), you will be covered (up to the limit of cover agreed) if one of your customers should fail.

As regards the level of cover available through a credit insurance policy, typically 80%-90% indemnity applies, depending on the type of solution you choose. Credit insurers are generally flexible insofar as your choice of which customers to cover. Some companies may wish only to cover their top customers or against ‘exceptional’ losses. (There are specific policy types available that allow you to do just this).

Top-Up cover

We can attempt to source top-up cover for policyholders where their existing credit insurer's credit limit cannot be increased further. For example should a credit limit on a buyer be limited to say £200,000 but a limit of £300,000 is required, a limited number of credit insurers will consider top-up cover to cater for the additional £100,000. The cover is not available where the main credit insurer has refused to agree any limit. 

To what extent do I need to be involved?

Your role is to provide the credit insurer with certain information, such as when a customer’s account becomes overdue beyond the contractual due date or any extended due date which may be allowed under the policy. You must also inform your credit insures if you receive or become otherwise aware of any adverse information about a customer which suggests that the customer may not be able to meet its financial obligations under the sale or service contract covered by the policy.

How soon will my claim be paid?

Typically you will be paid within 30 days of confirmation that an insured debt has been admitted to rank in the insolvent estate of your customer. We say 30 days, but it is true to say that in many cases the claim can be paid considerably quicker that this. In the case of protracted default, claims tend to be paid within three months of the occurrence of such a default, or the receipt of a claim form – whichever is the later.

How much does it all cost?

The cost of a credit insurance policy, is calculated as a percentage of a company’s insurable turnover, and will depend on its trading history, turnover, business sector and customers on which you need cover. Historically, the range is from less than 0.1% of turnover to more than one percent. Typically however, a company will currently pay 0.15% and 0.3% of insurable turnover although this could be much higher particularly for certain political risks and for clients with a poor credit management history.

Minimum premiums for whole of turnover (including any credit limit fees) range from between £3,500 to £5,000. 

Credit insurance premiums are usually paid by interest free instalments over 10 or 12 months. Insurers who charge a one-off 'limits charge' are made at the start of the insurance period or for larger risks a charge per limit held are charged monthly.

Summary

It is important to see credit insurance for what it really is. A business tool which can be used pro-actively as a mechanism for securing further funding for business expansion, something which can help them grow as their customers grow, and enable them to take on new business with confidence and security which they need going forward.

Contact us to discuss your requirements

Contact

John Isles ACII on 01253 598953 or email john@rowlands-hames.co.uk

or

Tony Swallow on 01253 598954 or email tony@rowlands-hames.co.uk

Additional Information

Q1 2011 Euler Hermes Economic Outlook

Q2 2011 Euler Hermes Economic Outlook

Q3 2011 Euler Hermes Economic Outlook

Q4 2011 Euler Hermes Economic Outlook

March 2011 Euler Hermes Risk Bulletin

June 2011 Euler Hermes Risk Bulletin

September 2011 Euler Hermes Risk Bulletin

Case Study 1

Case Study 2

Case Study 3

Case Study 4

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