Could Trade Credit Insurance Offer a Lifeline to Small Businesses?

It is a truth universally acknowledged that customers don’t always pay for services and goods on time – or, in some cases, at all. But in a climate of rising costs and tough trading conditions, addressing the problem of late payment might be even more critical to business survival.

“There has certainly been a noticeable increase in late payments being reported to insurers,” says Umberto Oliva, head of trade credit and surety at insurance broker Verlingue. “We have also seen a significant rise in repayment plans being offered to suppliers since Q3 2022, with the likelihood that this trend will continue well into 2023.”

When a company isn’t paid for its services or goods, it can cause significant cash-flow stress. Accounting software provider Xero reported that late payments cost UK businesses a staggering £684 million a year. At the very least, that’s less to spend on investment and growth, but in lean times the strain might prove too much. According to the Federation of Small Businesses (FSB), cash flow problems lead to as many as 50,000 UK firms closing every year.

It’s perhaps surprising, then, that even though insurance for overdue or non-payment for goods and services – called trade credit insurance, or bad debt protection – exists, in an FSB survey in January 2022, just 2% of small businesses had it.

Beyond bad debt

Trade credit insurance protects a business if customers don’t pay or pay later than the agreed date. The insurer steps in after a specified time, which is agreed at the start of the policy. For example, some insurers might look into your claim in two or three months after the invoice’s due date, though this timeframe can vary. If collection efforts aren’t successful, the insurer will then pay out a percentage of the amount owed (usually up to 90%). The misconception can be that it starts and ends there, though.

Before any of this happens, the insurer plays a central role in continuously assessing the credit risk of existing and new business clients, and helps set credit limits. “A policy can be very easy to operate and having cover in place can simply be viewed as an extension to the functions of a credit controller or credit management team,” Oliva explains.

This could reduce the risk of selling to certain clients, including those in international markets. “The policy can provide very interactive and useful intelligence that can be obtained from specialist credit risk underwriters, again with a view to assisting businesses growth, as well as mitigating bad debt losses,” says Oliva.

And this insight about a customer’s financial health can make all the difference. “A trade credit insurer will monitor businesses’ financial strength and will advise if a customer can pay for an order. Credit insurers could provide an early warning in case a customer’s risk assessment is not very positive,” says Richard Wulff, executive director of the International Credit Insurance & Surety Association (ICISA).

“This becomes even more important when the risk of non-payment increases.”

When your customers can’t pay

Customers falling into insolvency can be a key reason for failure to pay what’s due. This might be anywhere along the supply chain, creating a domino effect. Indeed, according to the British Insurance Brokers’ Association (BIBA), customer insolvency is the most common reason for a claim on a trade credit insurance policy.

Corporate insolvencies in the UK have been on the rise since 2021. According to government figures, the number of registered company insolvencies in England and Wales in November 2022 was 21% higher than the same month in the previous year, and 35% higher than in pre-pandemic November 2019. Comparing the same period, Scotland saw a 13% rise, and in Northern Ireland, company insolvencies more than doubled.

With this in mind, is trade credit insurance a lifeline for small businesses against this bleak backdrop and, potentially, worse to come?

When to consider trade credit insurance

Smaller businesses needn’t overlook trade credit insurance, though the options may be more limited. “Trade credit insurance is accessible for small operations throughout the UK, and some specialist credit insurers do offer products that can be feasible and economical for micro businesses to explore,” says Oliva.

Some businesses can be more inclined to consider this cover than others, though. This might depend on the sector your business operates in – for example, the construction and retail sectors tend to have a greater need for trade credit insurance.

Recent changes in the insurance market may have affected how easy (and affordable) it is to secure this cover. Oliva continues: “In some sectors, premiums are understandably hardening, however, this is a reflection of the current economic climate and uncertainty in the landscape. For many businesses, cash-flow and supply chain disruptions continue to cause issues and this is reflected in the steep increase in corporate insolvencies.”

To help small businesses deal with late payments, the FSB is encouraging insurers to develop simpler and more flexible options to allow better access for small businesses, such as covering lower invoice amounts.

Trade credit insurance is available through specialist brokers. Your turnover, sector, past losses and credit control procedures will affect what you pay, as will your level of cover, such as whether it’s your whole book of debt or specific, key customers.

On your side, clear payment terms and good documentation, along with streamlined invoice management and credit control, remain crucial to the process.

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