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.
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
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 cashflow. 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 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 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. Clients across all vertical sectors are able to pick up on any trends that indicate that a company may be getting in trouble. We combine this data with 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 further funding for business expansion and which can help businesses grow as their customers 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.
Richard Dormer is a director at BusinessSwitch.co.uk. For further details please call 0845 130 0726 or visit www.businessswitch.org
