No one can
be entirely sure what is around the corner, but with uncertain financial times
ahead protecting against all eventualities is a shrewd move for any business.
Credit insurance is therefore a useful tool for companies. In broad terms it is
an insurance policy against the non-payment of trade credit receivables,
providing businesses with protection against the failure of a customer to pay
trade credit debts. From this very basic definition there are numerous
variations of the product adapted to the needs of the client, their trade
sector, or to the circumstances of specific transactions.
Credit insurance is typically used to offer protection against the risk of
buyer insolvency but it may also cover for defaulters where there's a deferment
of payment due to circumstances beyond a buyer's control, including political
events in the case of export transactions. The core of the risks are insured on
a short-term basis (from 60 days credit terms to one year) but occasionally
insurance for medium-term projects involving the provision of capital goods can
be provided.
Better management of credit risk will ultimately benefit a company's bottom
line. The role of the credit insurer is to help companies to target the right
sort of customers and find those who will be good long-term customers. It helps
to target sales efforts, focusing on profitable buyers and markets and avoiding
financially weak customers and politically unstable export countries. It also
positively impacts on a balance sheet by reducing companies' bad debt
provision.
Credit insurance can also help clients to access cheaper financing as most
banks of invoice discounters will take into account the additional security the
credit insurance policy is offering.
As credit insurers take most of the credit risk of the company's balance sheet,
the credit insurance products help secure cashflows. Few people will question
the need to insure their plant, properties or other tangible assets, and yet
asset receivables usually represent 40% of a company's balance sheet. A company
that chooses not to protect this strategic asset is accepting the risk that the
failure of a few key clients might trigger significant unplanned financial
difficulties.
Many companies set up a bad debt reserve to cope with bad debts as they
come along, but the big problem is that the information available to help make
these decisions is out is date. Credit information can be bought fairly cheaply
from the likes of status agents, but this can be a year or more out of date.
Too often businesses that believe they can mitigate risk effectively do not
have access to the information they need to make the right decisions. Published
information from Companies House or one of the information providers selling
company data can be as much as 22 months out of date. Today the use of
proprietary information is becoming a critical tool in enabling the right
credit decisions to be made and this applies as much to businesses as to their
information suppliers, be they status agents or credit insurers, and allows a
clear differentiation between these suppliers to be made.
The credit insurer supports companies from the credit-vetting of buyers to the
collection of bad debts, providing companies with improved upfront information
of the credit quality of their prospect and regular monitoring of the financial
health of existing buyers. Good credit insurers help their clients to structure
their credit management process efficiently to avoid the risk of buyer
non-payment and to maximise the chance of achieving financial objectives. By
following the expert advice of credit insurers, clients are able to review
existing trading relationships and so reduce exposure to bad debt, effectively
allowing them to trade with peace of mind.
Increasingly businesses are realising the benefits that real knowledge from
companies such as Euler Hermes can deliver, well beyond the scope of simply
trusting themselves to get it right or trusting to luck. Thousands of customers
in the UK
and around the world report to Euler Hermes on a monthly basis on any overdues
from their clients. This information is not available anywhere else and it is used
to continuously monitor 40m companies. Euler Hermes has a lot of clients across
all vertical sectors and are able to pick up on any trends that indicate that a
company may be getting in trouble. We combine this data with our other
financial monitoring and risk grading of companies. This proprietary
information is available to nobody else and helps give customers the benefit of
an early warning if something is going wrong.
It is important to see credit insurance for what it really is: a business tool
which can be used proactively as a mechanism for securing futher funding for
business expansion and which can help businesses grow as their custormers grow,
enabling them to take on new business with the confidence and security which
they need going forward. Many of the benefits of credit insurance have a
positive impact on a business.
