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Credit Insurance – Could it help protect your business?

Updated: Nov 22, 2022

You've heard of Credit Insurance, yet it's a complex subject, could it help your business?

If you’re in sales, read on!

What is credit insurance?

Few businesses are ever entirely safe from the hazards of sustaining bad debts due to the non-payment of goods and services by defaulting customers.

Regretfully the pages of the London Gazette are littered with details of seemingly "blue chip" businesses over the years that have become insolvent, leaving the unsecured creditors to pick up the pieces.

Credit insurance provides cover to commercial policyholders against the impact of sustaining bad debts due to the insolvency or non-payment of commercial customers, for goods or services provided to them on open account credit terms.

The debtor book – the amount owed by its customers – represents around 40% of a business' assets. Sustaining a bad debt can be catastrophic, as the unpaid debt is no longer lost sales, but lost profit. A company will have to generate many fold additional sales to recoup a bad debt.

For example – If a business has a 10% profit margin and sells £50,000 of finished goods to a customer on credit terms 30 days from invoice date. Should that customer subsequently become insolvent prior to settling the account, it is unlikely there will be any recovery of the goods. So the business has sustained a £50,000 bad debt. This means the company has spent £45,000 on manufacturing goods they have not been paid for. They will need to generate a further £450,000 of sales to generate the £45,000 profit required to fund this loss.

A credit insurance policy can indemnify the business for usually 90% of bad debt. Using the same debt figures but on credit insured basis this time, a £50,000 bad debt would generate a claim payment of £45,000 and so cover most if not all of the business' costs associated with that debt.

Credit insurance can be used for a number of different applications and needs, namely:

  1. Traditional risk offset to protect the business' cash flow and profits

  2. To help a business enter new markets with confidence – New product lines and export sales in particular

  3. To improve credit management and improve cash collection

  4. Provide outsourced debt collection – Most policies have this service build in

  5. To support bank funding. The banks are moving away from traditional overdraft facilities to invoice discounting or factoring. This is where the bank buys the invoices raised by the business to its customers on a discounted basis – Usually 60%-80% of face value. The advantage to the business is they get their money (or most of it) very quickly rather than having to wait 30 days or more to be paid by the customer. The downside is the bank holds full recourse back to the business should the customer not pay the invoice. A credit insurance policy assigned to the bank will give the business peace of mind and provide the bank with added security comfort. This may improve the discounting percentage funded or reduce the funding charges.

We are linked with a specialist credit and surety bonds insurance broker, so if you need some advice or would like a quotation, please get in touch.

Contact us today to see how Simcox Brokers can help.

Email: Call: 0117 325 0560

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