Credit Insurance Information
What is Credit Insurance?
Credit Insurance protects you against customers who fail to pay their invoices.
Do I Need Credit Insurance?
The question of trade credit insurance is a difficult one within the small business. Can you as a small business owner afford to pay a premium to an insurance company for the protection of your most valuable balance sheet asset: CASH?
If, for instance, you are a manufacturer, and you have invested in raw materials, production, delivery costs, administration and finance costs etc to supply your customer with 5000 gadgets, and you then deliver those goods on a ’30 day un-insured credit terms’: it could be argued that you had lost control of your senses.
Your company has invested significant funds in the belief that you know your customer will pay! No doubt certain checks were made as to the solvency of your customer, and you saw nothing that would stop you from delivering those goods. There is nothing wrong in thinking like this: after all over 95% of UK trade (excluding export) is conducted without credit insurance.
Generally, if you offer credit terms to your customers you will benefit from an 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.
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.
How much does it cost?
Most credit insurance is sold on a whole turnover basis (whole book of debtors) and generally costs between 0.15 to 0.5% of a company’s turnover. Insuring selected invoices or customers starts at 0.4% of the insured amount. Many companies pass this cost on to their customer.
Can I get cash up front? How does credit insurance compare with factoring or invoice discounting ? (depending on the question the answer would be amended)
No, you would need to talk to a factoring or invoice discounting company for cash up front. In some cases, a credit insurance policy will make the debt easier to factor. Factoring is usually used to deal with short-term cash flow issues and credit insurance is used to provide you with “balance sheet” peace of mind.
Can I take out a policy on a customer who is in Creditors Voluntary Administration?
Generally, no. Credit Insurance policies usually protect you against companies that go insolvent during the policy period, not before the policy period.
Key Points
- If your write-off over three years amounted, in total, to 2.1% of any one year of your turnover, you would have been better off paying for and having three years cover for credit insurance
- You can have UK Domestic Cover or/and full Export Cover
- You can insure against the customer refusing to accept goods you have manufactured
- If any one/few customer/s of yours has a significant percentage of your turnover you need to use credit insurance
- If your customer enters into a Company Voluntary Arrangement to trade out of debt, all suppliers, bar those with credit insurance, will have to wait some time for payment
- You can complete a sale over the agreed limit, but you will suffer the loss above that insured -
totally flexible
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You can insure a single sale or a series of sales
- You can insure against consequential loss, caused by a supplier being unable, through insolvency, to fulfil their contractual obligations with you
- Credit insurance companies have almost unparalleled information on foreign country’s, and their involvement with you can in its self ensure sound business trades – if a credit insurer advises you not to complete a sale, you don’t!
- Your involvement with a credit insurer (as with a factoring company) will improve your credit management ability, and should provide you with safe, steady and profitable growth.
- 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.
Why is Business Insurance Different?
Credit Insurance – cover against insolvency
Commercial Insurance Terms
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