The Importance of Credit Insurance in Protecting Your Business from Financial Risk
In today’s unpredictable business world, companies face a range of risks, and one of the most significant is the possibility of a client or supplier going bankrupt or defaulting on payments. For many businesses, this type of financial disruption can have far-reaching consequences. This is where credit insurance comes in — a powerful tool that helps protect businesses from the financial fallout of unpaid debts.
One of the most recent examples of the domino effect caused by unpaid debts is the collapse of ISG Group, the UK’s sixth-largest construction firm. ISG’s administration, which has resulted in losses exceeding £400 million, has sent shockwaves throughout the industry, particularly impacting subcontractors and related businesses.
What is Trade Credit Insurance?
A Trade Credit Insurance policy is designed to refund you if a customer fails to pay and can even cover you if a supplier fails to deliver. In addition, most polices will also monitor your supply chain to alert you if a business you deal with is at increased risk of going bust, enabling you to take pre-emptive action.
How ISG’s Collapse is Affecting the Construction Industry
The collapse of ISG Group has highlighted the far-reaching consequences of one company’s insolvency on others within its supply chain. The company owed £23 million to Phoenix ME and £18 million to Irish construction firm H A O’Neil. With nearly 3,000 creditors affected by this insolvency, it’s clear that the ripple effect can be devastating. One notable consequence is the £38 million ISG owes to the UK tax authorities (HMRC), which will result in a significant loss to taxpayers.
What’s concerning is that even businesses that have no direct dealings with ISG may find themselves exposed to risk simply by being part of the same supply chain. This creates an urgent need for businesses to protect themselves from such financial disruptions — and credit insurance is one of the most effective ways to do so.
Why Credit Insurance is Crucial for Your Business
In situations like ISG’s collapse, businesses that rely heavily on a few key clients or suppliers are at greater risk. If one of these clients fails to pay or goes bankrupt, it can cause significant financial strain. With credit insurance, businesses can ease this risk by ensuring that their outstanding invoices are covered in the event of non-payment.
Trade Credit Insurance gives the policyholder access to information that provides an early warning mechanism for their customers’ financial problems. The credit insurance provider will inform the business of any changes that might impact the financial health of their customers and their ability to pay for goods or services delivered. They will then come up with a plan to mitigate risk and impact for the policyholder.
Trade Credit Insurance reduces risks which are out of your control, lets you offer credit to new customers ensures that you can continue to pay your own suppliers for goods and services and improves access to funds at competitive rates.
It is also a great way to boost sales by offering new customers favourable credit
terms to entice them to buy from you over your competitors.
Other Measures to Alleviate Financial Risks
Beyond credit insurance, there are several other proactive steps that businesses can take to reduce their exposure to financial risks:
- Regular Financial Health Checks: Assess your clients’ financial stability to spot potential risks early.
- Diversify Your Client Base: Don’t rely too heavily on a few key clients to avoid major losses.
- Strong Credit Management: Set and regularly reassess credit limits for your clients based on their financial situation.
- Stay Informed: Monitor market trends to anticipate any changes that could affect your clients’ ability to pay.
In light of the significant challenges faced by businesses due to the collapse of major companies like ISG Group, it’s crucial to have measures in place to protect your business from similar financial risks. Credit insurance is one of the best tools available to alleviate the risk of unpaid debts and maintain financial stability.
If you’re looking for more information on credit insurance or need advice on how to protect your business from credit risks, don’t hesitate to contact us on 01905 21681 or visit our website to learn more about credit insurance
https://www.sutcliffeinsurance.co.uk/all-insurance-products/credit-insurance/.
