What small businesses really need to know about credit insurance


Many businesses buy credit insurance to improve profitability and protect themselves against customer insolvencies.

However a range of misconceptions have grown up around this type of insurance which seem to deter some companies from purchasing the product.

Below, we look at the myths vs the facts to find out how beneficial credit insurance can be for small businesses.

But firstly, what is credit insurance?

On a basic level, credit insurance provides cover for businesses against bad debt.

If a customer cannot pay for their products and/or services due to insolvency, the supplier could claim on their insurance to cover that debt.

Credit insurance has a number of key benefits.

Most importantly it ensures that invoices are paid and allows companies to secure financial trade risks which would normally be based on trading histories, historic status reports or simply just the need to fulfil a sales order. Capital is protected and cash flow is maintained.

This enables suppliers to retain good working relationships with customers.

Credit insurance can also support growth by giving businesses the confidence to work with new customers and expand into new markets.

Businesses are given access to up to date financial information about buyers across the world so they can determine which ones are safer to work with.

Having the confidence to trade, businesses can then offer more flexible credit arrangements upfront or at point of sale, giving them an edge against competitors.

Sounds good. So, what are the myths to be aware of?

Myth: Credit insurance is designed for businesses exporting or trading with riskier buyers

This is not the case, as credit insurance also highlights low risk buyers.

These buyers are typically quicker payers, larger or more capable entities and, often, growing businesses.

Having access to this kind of insight can allow targeted sales to be directed towards these buyers, often resulting in many credit-insured customers benefiting from increased sales themselves.

As your customer grows, so can you.

Myth: Credit insurance is too expensive for a small business

Too expensive compared to what?

The cost of a bad debt?

The cost of turning down a sale because you think their risk is too high?

Purchasing credit insurance should not be taken lightly as it can save an SME from going out of business.

A report by ABFA, the Asset Based Finance Association, said that in 2015 British SMEs were owed £67.4 billion in unpaid invoices [more info here].

Moreover, a government report in 2017 estimated that a total of 4,152 companies entered insolvency during Q3 with many of them leaving their suppliers with significant, unsatisfied debts [more here].

Finding the right policy is key because the cost of these kind of insurance policies can vary.

An insurance company with an in-house team of credit analysts can provide added value by offering sector-specific market intelligence and ongoing support. We would advise looking at products that are tailored towards SMEs, as these are likely to be less expensive than some other products on the market.

Myth: A business only needs credit insurance if they’ve had issues with a client not paying

Some businesses may have excellent relationships with their customers and others may have been lucky so far.

But few will survive long-term without experiencing credit complications.

Credit insurance protects not only against clients who suffer insolvency but those who pay late.

These late payments are costing UK businesses more than £2bn a year according to a July 2017 report from Bacs Payment Schemes Ltd.

Additionally, company insolvencies were up 12.6 per cent in 2016, so the risk really does apply to any business.

In the same year, insurers paid out more than £4m a week for non-payment – that is £208m a year which businesses could have been losing [more here].

Any company which has receivables on its balance sheet has a potential exposure to loss – no matter how fortunate they have been until now.

Myth: Credit insurance is only applicable to larger businesses who do not know their customers

Once again, insolvency is often unexpected and can hit at any time.

Even a business which knows its customers well can be surprised by late payments or customers going bust.

Some of the high profile businesses which have folded recently have made big headlines – for instance Monarch airlines.

But smaller businesses, whose profitability is so often intertwined with that of their larger customers, are sadly suffering the same fate with far less fanfare, and can be taken advantage of by larger companies who know how valued their business is to them.

Whatever your political views on the subject, Brexit has also created a level of uncertainty which is affecting trade – and Economia recently ran a report suggesting the UK’s exit from the European Union was one of the biggest threats to business over the next two years [more here].

The beauty of credit insurance is the insight it provides, creating confidence when taking on new clients or generating new revenue streams.

Safe in the knowledge that they are only working with good, low-risk customers, suppliers can secure themselves a competitive edge in the market with the ability to offer open credit to customers.   

Written by Stuart Grice, Executive Director - Head of Trade Credit.