How does credit insurance work?

In short, credit insurance protects your business against customers failing to pay their bills. It is a form of business-to-business insurance. As such, ‘customers’ refers to other companies that pay you for goods or services.

If a company runs into difficulties, it may not be able to pay its bills or might go out of business altogether. In this situation, there is no guarantee that creditors, such as your company, will be paid. Even if you do receive some of what you are owed, it could be many months down the line.

Protection against business risks

This is obviously a substantial business risk that is out of your control. The best way to protect against it is by taking out trade credit insurance. This protects your company’s bottom line and allows you to plan ahead and expand the business, confident that your cash flow won’t be disrupted by customer difficulties.

Having credit insurance in place will also give other parties confidence in your company’s resilience. This could make it easier for your business to get credit at better rates, as well as funding from other sources.

Credit insurance: the detail

These policies are designed to cover debts due within one year, often known as short-term account receivables. It applies to customers that do not pay within an agreed time limit, as well as those that become insolvent and aren’t able to pay at all. Your insurer will conduct a risk assessment on each company you deal with, analysing and monitoring their financial wellbeing and grading them accordingly.

Your insurer will conduct a risk assessment on each company you deal with

Based on this grade, they will be given a credit limit that they are insured up to. You shouldn’t extend credit to that company beyond that point, as that is the maximum that you will be able to claim back on your credit insurance if they default. This limit may change depending on the company’s ongoing behaviour and fortunes.

Your insurer should keep you informed of any relevant information they uncover regarding your customers’ financial situation. This will help you make decisions about your ongoing dealings with them.

Which businesses need this cover?

Trade credit insurance is suitable for businesses of all sizes.

In the case of small businesses, one company’s insolvency can create a “domino effect”, bringing down companies it owes money to. This has an impact on the companies they owe money to and so on.

Credit insurance can protect against such a catastrophic chain of events. As such, it is also important to the overall resilience of a particular sector, and the economy in general, as well as your own company.

It is also important to the overall resilience of a particular sector

Larger businesses, on the other hand, may be likely to over-extend credit to many different buyers. If one defaults, they may be able to absorb the losses. However, if several are unable to pay at once, it could have a severe effect.

Credit insurance is, therefore, valuable for all businesses that rely on customers with credit accounts. It could mean the difference, in a crisis, between survival and going under.

Having worked with businesses of all sizes since 1982, we are specialists when it comes to credit insurance. As such, we can find the right type of cover for your business at the right price. Get in touch to find out more.

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