What is credit insurance?
Credit insurance provides your business with protection against the failure of your customer to pay their trade credit debts – i.e. money that is rightfully yours. Such a debt can arise as a result of your customer becoming insolvent (i.e. going bust) or because your customer simply fails to pay within an agreed credit period.
Who uses credit insurance?
The sensible ones! Credit insurance is suited to all manner of companies, regardless of whether they are trading nationally or internationally, and in all sectors from manufacturing to services. In terms of size they tend to be firms with turnovers from £250,000 through to the turnovers of the largest multinationals.
When and why would you consider using credit insurance?
On average, companies are estimated to have 40% of their current assets in the form of trade debtors. (For some companies this figure can be much higher).
Research has shown consistently that companies are unable to predict the vast majority of failures to which they are exposed.
Indeed it is estimated that up to 50% of all failures concern customers that were previously considered to be both long standing and prompt paying. It is a sobering thought that even the customer you thought you knew best of all could inadvertently end up being your downfall.
A further reason why businesses should consider using Credit Insurance is because a bad debt often causes a company to reduce the amount of credit it extends to its customers. Again in simple terms, it is easy to see how this potentially exposes that business to its competitors, leaving it in a potentially much weaker competitive position.
How does it work?
How it works is this: You ask the credit insurer for a credit limit on each of the customers with whom you trade above an agreed level. Below this level – referred to as your Discretionary Limit – you do not need to ask for a credit limit. Instead, you can use your own sources of financial status information and trading experience to justify the trade credit which you extend. Provided you trade within the set parameters and abide by the terms and conditions of the policy (which we shall come to in a moment), you will be covered (up to the limit of cover agreed) if one of your customers should fail.
As regards the level of cover available through a credit insurance policy, typically 80%-90% indemnity applies, depending on the type of solution you choose. Credit insurers are generally flexible insofar as your choice of which customers to cover. Some companies may wish only to cover their top customers or against ‘exceptional’ losses. (There are specific policy types available that allow you to do just this).
To what extent do I need to be involved?
Your role is to provide the credit insurer with certain information, such as when a customer’s account becomes overdue beyond the contractual due date or any extended due date which may be allowed under the policy. You must also inform your credit insures if you receive or become otherwise aware of any adverse information about a customer which suggests that the customer may not be able to meet its financial obligations.
How soon will my claim be paid?
Typically you will be paid within 30 days of confirmation that an insured debtor has entered insolvency. We say 30 days, but it is true to say that in many cases the claim can be paid considerably quicker than this. In the case of protracted default (i.e. late payment), claims tend to be paid within three months of the occurrence of such a default, or the receipt of a claim form – whichever is the later.
How much does it all cost?
The cost of a credit insurance policy, is calculated as a percentage of a company’s insurable turnover, and will depend on its trading history, turnover, business sector and customers on which you need cover. Historically, the range is from less than 0.1% of turnover to more than 1%. As each policy is tailored to a specific business needs, every policy is priced uniquely.
Credit insurance premiums are usually paid by interest free instalments over 10 or 12 months.
