Why trade credit insurance is essential to protect against customer insolvency
One unpaid invoice could be all it takes to push your business under. A previously reliable trading customer is slow to pay, the weeks drag into months and before you know it, you have a cash flow crisis. The customer goes into insolvency and you may find yourself unable to pay your own debts, or having to change credit arrangements for other customers.
Threats to your business
Most businesses take precautions to prevent this from happening, by checking the credentials of a company before trading with them, for example. Yet sometimes debts go unpaid because of circumstances beyond anyone’s control, especially when trade is taking place in an international or global setting.
Global trade offers exciting opportunities, but also serious risk. Even if your trading partners are excellent at what they do and follow the best business practices, there can be problems. Economic crisis, sanctions regimes, conflict, natural disasters – it’s hard to predict how these might impact your accounts payable.
Even trade with local customers and partners can be struck by disaster, as companies affected by flooding in the north in the last few months have discovered. Insolvency can set off a chain of delayed payment or non-payment which causes issues across business networks.
Trade credit insurance
There is a way to protect yourself against these risks. Trade credit insurance provides cover when your customers fail to pay trade credit debts, either because they have become insolvent or because they are unable to pay for a protracted period.
Like any insurance policy, there are different levels of cover and restrictions that apply. Your insurer will carry out an assessment on each of your regular customers, based on information such as annual accounts and county court judgment records. They will then be granted a credit limit and you, as the insured, will be able to claim a percentage of this limit in the event of non-payment or delayed payment.
This flexible system allows you to choose the level of risk and premium amount which is suitable for your individual circumstances. The insurer will review your customers’ credit rating regularly so the policy can be adjusted to fit the current circumstances.
Benefits to your business
Trade credit insurance provides a wide range of benefits. You are protected against going insolvent as a result of another company’s insolvency. This will save you a great deal of worry and stress if a trading partner experiences problems.
This form of insurance also helps to protect your company’s credit rating, as you will not be left unable to pay your own debts due to cash flow issues. It can also help to improve relationships with customers by introducing a clear and fair way to extend or withdraw credit.
In these times of globalisation, trade credit insurance is also an invaluable tool for those expanding their business overseas. Not only is the risk greater when you trade internationally, the prospects for recovering money from an insolvent customer can be fiendishly complex, often involving another legal system and difficulties with enforcement. Trade credit insurance takes the strain out of these trading relationships.
What would happen to your company if a major customer became insolvent?
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