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Trade Credit Insurance Explained - with working examples

Downloadable guide to Credit Insurance

What is credit insurance?

Credit insurance, sometimes known as trade credit insurance, export credit insurance or bad debt protection is a type of business insurance which covers losses arising from non-payment of goods or services.

Businesses frequently come across issues related to unpaid invoices and overdue invoices these can lead to company losses or bankruptcy. Credit Insurance helps to safeguard your company from losses arising from non-payment of trade related debts. Credit insurance gives you the confidence to grow profitably, it gives you the confidence to extend credit to new customers without the fear of insolvency. Our article on the fallout of ‘One unpaid bill’ explains how one company insolvency can trigger a chain reaction.

In its simplest form, credit insurance means that should the worst happen – a customer’s insolvency or protracted default – you can protect your bottom line and maintain your cashflow.

How does credit insurance work?

When you set up a credit insurance policy, you provide information on your business and customers. This includes a list of top buyers and a recent loss history. We review the financial health of your buyers to establish credit limits and terms of business, such as the maximum invoicing period.

In some cases, automatic coverage up to a certain amount or percentage of sales is granted to give greater trading flexibility.

During the course of the policy, we continually monitor your customers and adjust coverage accordingly. Likewise, as your company expands its sales, new customers can be added to the policy.

You can apply for credit decisions to be increased, reduced, or removed. We monitor your customers, thereby helping you to expand your business safely, or avoid potential loss.

If a customer does not pay you when they should have done, nor within any extended time, you can notify us and we will collect the debt on your behalf.

You can file a claim when a customer is insolvent or financially unable to pay the balance owed.

“It was very easy to get up and running with Coface. We gave them a list of our account customers and all the credit limits were in place before we made the transition.”

Rob Bowrey, Chairman Stanley Gibson

Credit insurance covers you against;

  • Bad debt
  • Late payments
  • Political risk
  • Natural disaster
  • Pre-shipment risks

Policies will vary depending on the business and the insurer.

Types of credit risk

  • Bad debt due to customer insolvency
  • Protracted default (late payment)
  • Political risk – non-payment because of events like wars, disasters or exchange restrictions

Risk level

There were 17,196 underlying company insolvencies in 2019, according to the Insolvency Service.

  • Coface economists forecast insolvencies will be 33% higher in 2021, compared with 2019.
  • According to Pay.uk, UK SME late payment debt stood at £23.4 billion in 2019, with 54 per cent of SMEs affected by overdue payments.
  • Research by the Federation of Small Businesses (FSB) showed 62% of small businesses were subject to late or frozen payments because of the Coronavirus pandemic.

The possible consequences

  • The UK Small Business Commissioner reports that 20% of UK small businesses have experienced cash flow problems due to late payments.
  • It is estimated that a quarter of company failures are due to defaults on payments.
  • Bad debt could wipe out a company’s profits and force it to increase productivity just to make up lost revenue. For example, a company with a margin of 4%, would need to increase turnover by £250,000 to make up for a loss of £10,000.
  • Chasing unpaid debts incurs additional costs (collections agencies, legal proceedings etc) and demands on your time, causing an unwelcome distraction from your real purpose.

What are the benefits of Coface credit insurance?

Coface has been a global leader in credit insurance for 75 years. With Coface, you can:

  • Safeguard your business against bad debt and establish realistic credit limits for customers
  • Run credit risk checks to monitor the financial health of your customers and assess risk before you trade
  • Access our debt collection service to rapidly collect late payments
  • Unlock better financing options, including more favourable borrowing terms
  • Identify opportunities for growth both domestically and in new markets

 

How Credit Insurance works flow diagram

“Coface are a valuable source of information about potential and existing customers and will go out and meet a customer if necessary. That adds significant value for us.”

John O’Connell, Group Treasurer, Origin Enterprises

Is a credit insurance policy different from other types of insurance?

With most types of business insurance, such as employers’ liability or buildings insurance policies, the provider has little contact with their policyholder between renewal times, unless they receive a claim.

By contrast, the best credit insurers actively support a company’s trading throughout the year and provide an early warning system about changes in the risk status of customers so it can avoid foreseeable losses.

To be effective, credit insurance should be a partnership between both parties. The policyholder tells the insurer about customers’ payment behaviour and notifies overdue payments. The insurer feeds this customer information into its database alongside data from other sources, such as financial statements and public records.

Meanwhile, the insurer gives the policyholder access to its wealth of business intelligence and expertise in credit risk. Working together, they can determine the level of credit risk, adjust the level of cover and agree credit limits, assess the financial health of customers and focus on the most profitable.

 

What is credit insurance diagram

 

Coface are a valuable source of information about potential and existing customers and will go out and meet a customer if necessary. That adds significant value for us.”

John O’Connell, Group Treasurer, Origin Enterprises

Is a credit insurance policy different from other types of insurance?

With most types of business insurance, such as employers’ liability or buildings insurance policies, the provider has little contact with their policyholder between renewal times, unless they receive a claim.

By contrast, the best credit insurers actively support a company’s trading throughout the year and provide an early warning system about changes in the risk status of customers so it can avoid foreseeable losses.

To be effective, credit insurance should be a partnership between both parties. The policyholder tells the insurer about customers’ payment behaviour and notifies overdue payments. The insurer feeds this customer information into its database alongside data from other sources, such as financial statements and public records.

Meanwhile, the insurer gives the policyholder access to its wealth of business intelligence and expertise in credit risk. Working together, they can determine the level of credit risk, adjust the level of cover and agree credit limits, assess the financial health of customers and focus on the most profitable.

How much does credit insurance cost?

There are credit insurance policies to suit all budgets. Premiums are generally set according to turnover and business profile – including industry sector, number of customers and previous loss history.

After an assessment, the credit insurer will provide a quote that sets out price and policy terms, including amount of cover, level of self-retention (typically 10%), and whether there’s a deductible or minimum threshold for claims.

I have great business partners who always pay invoices on time. However suddenly they have only part paid, payments have become late or not at all?

Then our credit insurance will pay the outstanding invoices, so that there is no loss of debtors. Credit insurance ensures that your business can continue to trade despite financial setbacks.

I don’t think this will happen to me, I’ve worked with my clients for years.

We are increasingly finding that companies think that a loss will not happen to them. However it’s happening more often. The customer you’ve supplied products or services to for years can also end up in financial difficulties. With credit insurance you can cover the debtor loss and we can also see in advance whether your customer is able to pay your invoices.

Why do you need credit insurance?

Credit insurance gives you essential cover against credit risks such as non-payments or late payments. If a customer doesn’t pay, you can simply claim against your insurance policy.

The COVID-19 pandemic, current recession, and rapidly changing financial health of many businesses have made credit insurance more important than ever. In uncertain times, you need to be certain your cash will keep flowing. Which is where credit insurance helps.

“We would recommend Coface because the policy is so flexible and easy to manage. When we had to make a claim, the service was very good and they paid within a month.”

Irene Rous, Credit Control Supervisor, Smeg UK

Is credit insurance right for your company?

Whatever sector you work in, Coface credit insurance policies are taken out specifically for your situation. Coface not only offers credit insurance for the United Kingdom and Ireland, but also companies that operate internationally can take out credit insurance with Coface. This also allows your company to grow safely globally.

Even if you have checked in advance whether your customers are reliable, often a customer does not pay an invoice. You have already spent money on this customer by delivering goods or a service, but you have not yet been paid for this. Unfortunately, this is more common than expected. Credit insurance offers the solution for this. With a Coface credit insurance you will receive extensive company information about your customers, we will carry out the collection for you and you will receive a claim payment if things go wrong.

How else can credit insurance benefit businesses?

Better banking terms

Banks are more likely to lend to businesses that have credit insurance, as well as provide larger lines or reduced financing fees for covered receivables. Borrowing costs are also often lower. The opportunities and cost savings provided by trade credit insurance can offset the cost of the policy.

“As traders, we obtain working capital from our bank and then we receive our money when the customer pays. The banks themselves make credit insurance a condition for access to trade finance.”

Sergio Vignone, Credit Manager

Improved cash flow

Your cash flow is powerful yet vulnerable resource and you know the importance of protecting yourself against unpaid invoices and insolvencies. These can impact your cash flow and pose a threat to your company. Credit insurance helps companies avoid risks and replaces cash flow should the worst happen and a customer insolvency or non-payment occur.

Mitigate against loss

For example, a manufacturer with a margin of 4% that experiences a non-payment of £50,000 would need 25 equivalent sales to make up for a single instance of non-payment. Credit insurance mitigates against this loss.

Save money on expenses

You can cut spending on credit information as that’s covered, and you won’t need to waste resources on chasing collections. Your company can also deduct the cost of the policy as a business expense.

Free up bad debt reserves

Capital set aside as reserves can be freed and converted to earnings.

 

Increase sales

Credit insurance lets you offer more competitive credit lines to existing customers as well as identify new market opportunities. Making it easier to grow your business. Multiplying this increase by several customers could easily offset the cost of a policy

Business development

By entrusting the protection of your debtor book to credit insurance you can focus your time on business development. Additionally Coface offer a global analysis of country, sector and company credit risk in real toime giving you the freedom to pursue your growth strategies with confidence.

Supplier relationships

You may be able to negotiate favourable terms with your suppliers as a credit insurance policy reduces the impact of a bad debt on them and potentially the whole supply chain.

Peace of mind

Credit insurance is there to help you prevent and mitigate your trading risks, so you can develop your business with the knowledge that your accounts are protected. Credit Insurance is there to help you take the right decisions.

A real life example of using credit insurance to increase profits

A business wanted to expand sales with its current customers but was not completely comfortable offering them higher credit limits. They contacted Coface credit insurance to cover the higher credit limits so they could increase the amount of credit offered to customers without risk. This let them grow revenues and deliver more profits.

This business was able to capture £300,000 of incremental gross profit from just one trading partner. These benefits can be multiplied across a broad portfolio of its customers.

A real-life example of using credit insurance to improve lending terms

A wholesaler of chemicals and raw materials improved its ability to secure credit by adding credit insurance. The company, which sells to overseas customers, needed to provide more transparency to its lender, who was concerned about foreign receivables in the borrowing base.

“We purchased trade credit insurance initially to facilitate the perfection of our credit line facility,” says the managing director and CFO. “From the initial objective of providing comfort to our banks, the service added depth to our business decisions.”

The interaction allowed the company to assess its clients’ condition more accurately and has been a valuable tool in business development.

Want to know how Coface can help your business know more and grow more?

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