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Why should businesses take out trade credit insurance

Benefits of trade credit insurance

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. In terms of size, the benefits can apply to micro SMEs, right through to the largest multinationals.

While protection against non-payment is often perceived as the main reason to purchase credit insurance, there are also a number of other benefits to businesses taking out credit insurance:

Expanding sales

Trade credit insurance helps businesses to safely sell more to existing customers or expand to new customers, that may otherwise have been deemed too risky, knowing they are insured should the customer not pay their debts.

Helping expansion into new international markets

Trade credit insurance helps protect businesses against the risks of exporting overseas, reducing uncertainty for firms.

Obtaining better finance terms

Banks will typically lend more capital to businesses who have trade credit insurance in place.

Gaining in-depth knowledge of the marketplace

Trade credit insurers provide businesses with extensive knowledge of companies, sectors and economic trends to help them grow safely.

Reducing bad-debt reserves

Trade credit insurance helps free up capital for the business to use elsewhere. In addition, credit insurance premiums are tax deductible, unlike bad-debt reserves where a company simply sets aside money in case a debt is not recoverable.

Protecting against non-payment

Should a customer be unable to pay its debts due to insolvency or protracted default, trade credit insurance will pay out a percentage of the outstanding amount owed (typically around 90%).

Case Studies

The following case studies provide some real-world examples of the benefits of having trade credit insurance:

The construction firm

When the customer of a construction company unexpectedly went into insolvency, their cash flow was secured by the quick payment of their claim for £600,000 under their credit insurance policy.

For this medium-sized company, the sudden failure of a major customer owing this significant amount had the potential to place the viability of the company in doubt. Unlike many business failures, poor financial performance was not to blame, so the insolvency was unexpected and caught the whole sector by surprise, meaning there was no time for the company to reduce their credit exposure.

However, the company had insured their trade receivables with a credit insurer, who as soon as they were aware of the situation had their claims team work with the policyholder companies credit manager and broker to ensure swift payment of the claim. Less than 4 weeks after submitting the claim, the construction company received payment in full, helping prevent the potentially damaging impact on their cash flow and balance sheet.

The multinational

As a multinational company that operates around the clock, is present in almost 100 countries with a direct presence in over 30, this international manufacturer not only appreciates the cover provided by their credit insurance policy, but also really values the information their insurer can provide them with about the companies in different parts of the world they want to do business with.

The relationship with their credit insurer allows them to apply for a credit limit for a new customer, and if the insurer is happy with the request, then the limit can be agreed quickly. If they do not agree, then the firm knows more work may need to be done and more information required to have that credit limit accepted.

Having a credit insurance policy allows this multinational firm to ensure they are not taking on any unnecessary risks, and work with their insurer who have taken the time to visit their larger subsidiaries and really understand how the business operates. While they work directly through their broker most of the time, they can have direct access to the credit insurer if they wish, when they need them.

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The SME

This SME makes bespoke metal products for specific construction projects that can take over a year from first design to an order being placed with them. Having experienced a few cases of non-payment, this SME took out a credit insurance policy to help mitigate these scenarios in the future and ensure they can continue to meet their obligations to pay factories, suppliers and distributors on time, if they experienced non-payment again.

Buying direct from the credit insurer, the SME was able to obtain a comprehensive credit insurance policy, with credit limits based on the latest information about their customer’s financial health; indemnity for unpaid customer debts; and the collection of overdue payments.

The SME also had access to the insurer’s online policy management tool that allows them to request policy limits almost instantly, which helps them to decide quickly if a new/ potential customer is a suitable risk, and reduces the administrative burden on them.

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The exporter

In the 1990s, the fashion retail sector was going through a period of significant change, where some large brands were experiencing growth and others were struggling, with some falling by the wayside. As a result a leading clothing manufacturer decided to purchase credit insurance as a way of managing their risk.

The firm had just embarked upon a major export drive and so taking out a credit insurance policy enabled them to manage the risk on a real time basis rather than relying on past trading history and historical accounts.

They chose a credit insurer with offices and affiliates around the world that had sector and customer specific market intelligence that they could rely on before deciding to trade with anyone.

In addition, the credit insurance policy also gave their banks more confidence they were taking a prudent approach to running their business, which in turn, helped the manufacturer to seek increases in the trade finance they required to run their import-export business.

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