By Trevor Williams, Head of Credit & Surety Europe at QBE and Chair of the ABI Trade Credit Committee
After #Brexit, #uncertainty is arguably the top trending word for UK businesses in 2016. And let’s not beat around the bush: the news doesn’t look good. Article 50 is yet to be triggered meaning businesses are likely to remain in limbo for a long time while trade agreements are decided. Additionally the markets are reacting with great uncertainty following the unexpected results of the US election.
In these uncertain times, businesses need support to help guide them when trading domestically or when exporting. They need to have the confidence to trade, secure in the knowledge they are financially protected; and they need to be able to identify the markets, sectors and trading partners that will allow them to grow safely.
This is where credit insurance has a vital role to play. Credit insurance is a business-to-business type of insurance providing cover against the risk of not being paid for goods or services that providers sell. Credit providers want to remove uncertainty by providing businesses, big and small, with the confidence that they can operate in the face of commercial and political risks.
Credit insurance policies are suitable for all types of businesses, whether they are trading nationally or internationally, and for a variety of sectors from manufacturing to services. With regard to size, the benefits can apply to micro SMEs right through to the largest multinationals.
When a company agrees to sell its goods or services on credit to a customer, it places itself at risk of non-payment and the effect can be detrimental to the company’s balance sheet and future success. Should a customer be unable to pay its debts, credit insurance will pay out a percentage of the outstanding amount owed (typically around 90%). This protection gives businesses the confidence to extend credit to new customers and also improves access to funding, from banks and financial institutions often at more competitive rates.
Unlike other business insurance products where the relationship between the insurer and business remains static until a claim is made, credit providers will be there every step of the way to help their customers manage risk by offering guidance and advice about credit risks and new markets to help businesses expand. Policyholders will have access to an extensive information network, which acts as an effective early warning mechanism for adverse customer trends. Should the alarm bells ring, credit providers will work with their customer to mitigate the risk. Many suppliers find this invaluable, particularly small to medium-sized businesses that may lack the internal resource to monitor developments themselves.
Annual stats from the ABI show that ABI members paid out more than £149m in claims to UK businesses in 2015; allowing them to continue to trade and grow, despite the financial distress of non-payment for goods or services supplied by the policyholder.
ABI figures show:
• £149m paid out to businesses, the equivalent of £3m a week, to support them when a trading partner did not pay them money owed.
• 11,000 claims were made by businesses on credit insurance policies.
• 74% of policies cover businesses trading domestically, 22% of policies cover businesses exporting goods abroad.
• More than 11,900 policies were sold by credit insurers.
It’s difficult to know what the future will look like for businesses post the EU referendum, but with credit insurance, companies can be rest assured that they can grow and trade with confidence.
A copy of the ABI Trade Credit Guide is available here.