Trade credit is a commercial weapon that must be handled with care in order to protect your cash flow. Taking out a trade credit insurance policy remains the most efficient way to manage your trade credit risk.
What is trade credit insurance? Simply put, it is an insurance against bad debt: if your customer fails to pay you, your insurer indemnifies you for the insured amount.
It's the most complete solution: it integrates at the same time a financial information service on your customers and prospects, a debt collection service and compensation in case of non-payment. You therefore make big savings on structural costs.
A strong trade credit insurance remains the most reliable way to deal with insolvency risk. It guarantees an efficient protection of your cash flow in case of unforeseeable events. If your customer fails to pay you, the insurer indemnifies a proportion of your receivable.
Trade credit insurance – also called accounts receivable insurance – can basically be seen as a ‘bad debt insurance’. But while it is simple in principle, its proper implementation requires a great deal of know-how in order to make the most of all the possibilities it offers.
The insurance premium is calculated based on your company turnover and its sector of activity, as well as the level of coverage you want for each customer. But once this premium has been paid, your cash flow is totally secured.
This particular solution gives you the confidence to enter new markets and make competitive offers to your prospects while protecting your cash flow.
Predictive Protection:
Your insurer usually analyses and keeps you informed of the financial situation and creditworthiness of your new and existing customers, in order to help you assess how likely they are to pay their invoices on time and avoid potentially risky customers.
Your insurer will let you know the credit limit they are prepared to insure for each customer, meaning the maximum amount they will indemnify if that customer fails to pay.
This way, you can anticipate the risk of bad debt and adjust your credit control policy in real time.
This dimension is key: your insurer should not be a simple service provider, but an actual partner who accompanies you over the long term and advises you on a daily basis for the sake of your commercial development.
In the UK, SMEs agree up to 45-day payment terms from completion of work or delivery of goods. Despite this, almost 40% of invoices issued in 2019 were paid late (Source: MarketFinance Business Insights).
Debt Collection:
In the event of unpaid invoices, you inform your insurer. If your policy includes debt collection, your insurer will start the debt collection proceduresby investigating and trying to collect payment: after all, your customer just might need more time to pay you. If your customer has gone bankrupt, your insurer will deal with the receiver or liquidator on your behalf.
This service allows you to optimise your organisation by outsourcing a task that is potentially very costly and time-consuming.
Indeed, debt collection requires a great deal of expertise that some companies – especially SMEs – do not have.
Commercial law is often complex and varies greatly from one country to another. An in-depth knowledge of local situations and current legislation is necessary to manage these potentially long recovery processes effectively. Euler Hermes country risk reports give you clues to manage these local risks and practices effectively.
The nature of the risk is also increasingly political between Brexit, the Chinese-American trade war, growing geopolitical tensions and monetary policy reversals. Your insurer needs a strong macroeconomic and geopolitical expertise to assess credit risks properly.
Some insurers offer political risk insurance for certain specific cases: civil or external conflicts, iniquitous acts of government, monetary crises...
Indemnification:
If collection is unsuccessful, regardless of your client's legal situation, you are indemnified for the insured amount according to the terms of your policy, often up to 90% of the debt. Whether through debt collection or indemnification, you should get all or most of the money owed to you.
The trust factor is essential here: your insurer must offer you extremely clear terms of compensation.
A service of this nature also requires an insurer with enough financial strength to deal with difficult economic situations – especially with the Covid-19 epidemic, as trade credit risk has rarely been so strong.
