Trade credit makes up nearly half of the assets of the average small business which means late payments pose a significant risk to cash flow. A trade credit insurance policy can help protect your business’ cash flow by securing your accounts receivable against customer defaults. Some trade credit insurers cover insolvencies caused by unprecedented events such as the COVID-19 outbreak.
Trade credit insurance can provide companies with the confidence they need to extend additional credit lines to customers, enter new markets, and innovate without fear of losing essential working capital. By insuring their sales ledgers, businesses can grow more quickly and increase their profitability.
How does trade credit insurance work?
An insurer will assess a company’s level of credit risk and then set a credit limit for each of its commercial customers. The business will be insured against bad debts caused by customer insolvencies up to the set limit. Trade credit insurers typically pay between 75-95% of a loss. It is the responsibility of the business to chase any overdue payments and report them to the insurer but if debt collection services are included in the policy, the insurer will pursue payment on behalf of the policyholder.
For a small business with tight profit margins, is trade credit insurance worth it?
If one of your commercial customers becomes insolvent whilst your invoices are outstanding, a significant bad debt could put your business at risk of insolvency. The average UK small business has to make approximately ten times the value of a bad debt to break even. For example, a loss of £15,000 would require a company to make an additional £150,000 in sales. For most businesses operating within narrow margins, this just isn’t possible.
Thankfully a range of new products for small businesses have entered the market in the past couple of years. Technology is enabling insurers to offer more affordable policies without lengthy contracts, making trade credit insurance more accessible and flexible than ever before. The ability to run instant credit checks on customers can help to empower a small business’ sales team and act as a catalyst for growth.
When to take out trade credit insurance
A business’ sales ledger is one of its most valuable assets, and whilst protecting this asset with trade credit insurance is prudent under normal conditions, it is particularly helpful for tackling the risk and uncertainty caused by the pandemic. Taking out trade credit insurance is a good idea in the following scenarios:
- Your customer’s payment habits change: If your customer suddenly changes their payment habits, it could be a sign that they are experiencing cash flow difficulties.
- Your supplier is paying later than usual: In the event that your supplier’s payment schedule starts to slip, taking out trade credit insurance will protect your bottom line.
- You have a large or variable supply chain: Even when you know your customers well, today’s global can be volatile. Trade credit insurance can give small businesses access to risk analysis and insights leveraged from international market data.
- The nature of your business can create cash flow problems: Having insurance in place helps to protect your business against negative cash flow in the event of a customer’s non-payment.
- You operate a low margin, high volume business: Businesses that rely on high sales churn can enhance decision making by taking advantage of trade credit insurers’ expert credit risk analysis.
Nimbla invoice insurance is a next generation insurance product for small businesses offering flexible protection against loss caused by insolvent customers.