Trade Credit Insurance: what is it and why is it needed?
Trade Credit Insurance has been in the press a lot over the last six months, but what is it and why? Duncan Sutcliffe, director, Sutcliffe & Co, explains:
“Over a quarter of companies in the UK have experienced financial pain this year through the insolvency of a customer or supplier, or a long outstanding debt. Often the problem can be related to the ‘domino effect’ of a major company going into administration or not paying its suppliers, leading to them falling on hard times and this cascades down the supply chain. For example, within a week of Carillion’s collapse one of our clients who specialises in roofing work was forced into liquidation as they were a sub-contractor to a business working for Carillion and money had dried up – they did not have credit insurance.
“The risk to your business can be reduced by monitoring the credit profile of your customers or supply chain, giving you advanced warning of potential financial difficulties which will allow you to intervene and tighten payment terms. Credit profile monitoring is just one service that can be provided by a trade credit insurance policy, something that the newspapers are reporting today in relation to the Debenhams chain.
“However, if things go from bad to worse and there is a long default in a payment that a customer owes you then your trade credit insurance will chase and recover the debt or, if irrecoverable, will pay the debt.
“Worst case, if your customer becomes insolvent a credit insurance policy can pay the outstanding amount owed to you.
“Credit insurance will therefore improve cash flow and reduce the risks to your business.”