With a wide variety of factors affecting the UK economy, from Brexit to the trade war between the US and China, we live in uncertain economic times and there doesn’t seem to be a great deal of stability coming over the horizon.
This uncertainty and instability can play havoc with business finance and with the lack of liquidity available to businesses it is possible we will see more volatility in the market and more business closures.
So in these uncertain times how can you protect your business from bad debts?
One possible answer is Credit Insurance, which is a policy that protects your business from companies who can’t pay their invoices whether through insolvency, protracted default or political risk.
How does Credit Insurance Work?
Generally speaking, the insurers work out a premium based on a small percentage of your sales turnover to provide cover on your whole debtor book.
I often get asked by clients if they can insure the one customer they are worried about – however this is counter productive as the insurers will probably charge you as much to insure your most high risk customer as they would to insure all of them.
When requesting a quote you will need to provide full details of your debtors to the insurers, as well as details of your credit terms and also the amounts owed by individual debtors. From this information the credit underwriter will assess the risk presented and the credit worthiness of your customers. From this exercise they will not only tell you the premium they would charge but also what credit limit they would grant on your customers.
A word of caution!
Something to be aware of, however, with credit insurance is that the insurers can amend your limit throughout the policy period, depending upon their ongoing intelligence as to the credit worthiness of your customers.
If it looks like a company is in financial difficulty you will find that the insurers will either reduce or remove your limit altogether. This can obviously cause you a problem, but it is also a good indicator that you should probably be reducing your exposure to that customer if you can.
So, in summary, Credit Insurance can be a real benefit to a business if used and understood properly. It can also be a requirement of many lenders if you are entering into an invoice finance facility.
If you would like to know more please don’t hesitate to get in touch.
Sam Leeder ACII