b) Self-financing
A business may have to finance the loss or late payment of a debt from their own turnover. This may mean a business with a high profit margin may have to increase their turnover significantly to make up for even the smallest amount of money.
c) Reduced competitiveness
A business suffering from bad debts may have no choice but to reduce the amount of credit they offer making them less competitive.
d) Collection & legal costs
If a business decides to take action to recover debts, this can often result in collection fees or solicitor fees. Alternatively, if the business decides to recover the debt themselves, the process can be timely.
Generally, if you offer credit terms to your customers you will increase your sales (the problem is you will also increase your bad debt). Is it an acceptable cost to insure those credit sales? Well, if you maintain the average annual company bad debt of 0.7%, and with the average annual insurance charge of 0.7% of turnover, the answer begins to sound obvious, 'yes'. Plus you will have the added benefit of extended cover across your debtors as a whole.
You can expect to be paid by the insurer about thirty days after insolvency has been confirmed by the insolvency practitioner (this in practice could add up to 4 - 9 months after invoicing).
Premiums can be paid quarterly, in advance. Remember, if you increase your credit sales you will increase your premium.
A note on export credit insurance: Many unforeseen and disruptive circumstances can appear in the world today. As we have seen of late, this is not confined to third world countries. War, political unrest, military coup d'état, fraud, and all the problems any business in the world can suffer makes export sales without credit insurance: business suicide. Many suggest that your initial sales are covered, and evaluate at a later date when you have a high degree of trust.
Types of Credit Insurance
There are many types of credit insurance offered today, which are usually further tailored to the specific security needs of the business.
a) Whole turnover cover
This comprehensive policy will cover the whole business. The policy allows the business to offer credit up to a certain amount: anything above this figure must be agreed in advance by the insurance company. The premium paid is based on the turnover of the business.
b) Critical customer cover
This policy allows a business to have insurance cover against a number of named customers (usually up to 10). Such customers may be under threat from insolvency, have a poor credit rating, or may be key customers. The business will be fully responsible for the remaining customers not covered by the insurance. The premium paid is based on the total outstanding debts of the named customers.
c) Specific risk cover
This policy allows a business to have insurance against a single customer or a large contract. The premium paid is based on the contract value or the turnover of the customer over the policy period.
d) Export credit insurance
If a business trades outside of the UK, this policy can offer insurance against non-payment of overseas customers. This type of policy can also insure against a number of risks including political issues, currency issues and dis-honoured letters of credit.
Ways to Buy Credit Insurance
There are several ways that you can buy credit insurance for your business:
a) Broker
Over 85% of credit insurance policies are sold this way in the UK. Brokers will offer tailored advice and administrative support and will earn a commission on sales.
b) Direct from insurance companies
Most insurance companies usually employ brokers to sell credit insurance: however, it is still possible to approach a credit insurance company directly.
c) The Internet
The Internet is becoming increasingly popular to purchase such insurance, particularly to small businesses.
FAQS
What is credit insurance?
Protection for your business against non-payment by a debtor/s where goods or services supplied were not paid for upfront on delivery.
What are the benefits of credit insurance?
Credit insurance policies help out when your customer pays late (sometimes referred to as protracted default) or goes insolvent. The policy acts like a safety net protecting you from suffering financial loss because of your customer’s failure to pay.
What exactly does the insurance cover?
Normally 90-95% of the insured debts – when the buyer of the goods/services becomes insolvent or does not pay on time.
Can I be specific about what I want to insure?
You can insure individual invoices or specific customers or your whole book of customers. Insuring selected invoices or customers has only recently become available. Instant Invoice Insurance can now be purchased over the internet.
