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What is credit insurance and why is it so important?

In short, Credit Insurance is designed to protect your business if a customer does not pay, or goes bust, or a supplier does not deliver, or goes bust. It can also keep an eye on your customers’ credit to give advance warning and help reduce exposure to potential bad debt.

Are you at risk from your customers?

Duncan Sutcliffe, director, Sutcliffe & Co Insurance Brokers, advised: “In these turbulent times, whether your supply chain and customers are local or international, your business is likely to be affected by the Coronavirus. You may find your supplier is being affected by their own supply chain, impacting on your deliveries; or your customers may start to delay payment beyond the credit terms agreed. Consider what is happening with Debenhams, Carluccios and Cath Kidston; all strong brands that are calling in the administrators. This is why you need to understand the protection credit insurance provides for the longevity of your business.”

You may think that your business model, and those of your customers, mean you are ‘safe’. It is worth acknowledging that in a ‘normal’ economy, over 70% of businesses suffer bad debts, with over 50% of UK insolvencies involving well established, prompt paying customers – and up to 40% of a company’s assets are tied up in the debtor book. Considering the impact of Brexit, the budget and the Coronavirus are still mostly unknown, there has never been a more poignant time to take steps to protect your business.

What does credit insurance do?

If you are not paid or a contract is not completed and you are out of pocket, the insurer will chase the debt on your behalf. If that debt is not recoverable, then the insurer will pay the loss (or more normally 90% of the loss). In addition, the insurer will monitor the credit status and stability of your supply chain and warn you if a business looks vulnerable, giving you the opportunity to act in advance. Having the knowledge that your credit risks are reduced allows you to operate with more confidence.

It’s not all doom and gloom and looking for the bad debt, though: credit insurance can also be used as a tool to assist with increasing your sales and profit. How? Here’s an example: a company’s finance department had restricted a credit line to a customer to £100,000. They then purchased a credit insurance policy, and the insurer was able to approve a limit of £150,000 on that same customer. With a 15% margin and an average days sales outstanding of 45 days, the company was able to increase their sales to realise an incremental annual gross profit of £60,000 on just that one account.

If you would like advice on credit insurance, then give us a call on 01905 21681 or get in touch via email.