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This guide will provide you with an overview of how credit insurance protects your accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.
What is credit insurance?
So you’ve sold your product or service on credit to another company, and you are relying on that company to pay you on the due date. Imagine, however, what could happen if you don’t receive payment.
You have probably invested a lot of hard earned cash into the transaction and you need the payment to continue the business cycle. Non payment from your customer may well have a negative impact on your cash flow and could even cause your business to fail. Credit insurance protects companies from non-paying customers, both locally and internationally.
The provider of credit insurance will:
- access trade information on your potential buyer
- assess the credit worthiness of the buyer
- recommend and insure trading values with that buyer
- collect debt that is outstanding in the case of non-payment
- pay you a claim in the event of non payment or insolvency of your client
The benefits of credit insurance
- Protection against non-payment and client insolvency
- Lower legal costs through improved buying power of collection services
- Enhanced financing mechanisms by providing added security to finance providers
- Expert assessment of credit risks
- Development of new markets in different industries
- Increased market penetration
- Access to expert advice on collection techniques
- Stabilised cash flow
What types of businesses need credit insurance?
If your business is in the manufacturing sector and you have invested in raw materials, production, delivery costs and finance costs in order to supply the customer with 20 000 devices, credit insurance is a no-brainer.
However, companies of all sizes and in diverse sectors use credit insurance as it protects them against bad debt. After all, receivables can represent a significant portion of your business’s assets, something that new business owners often forget. In many instances, the debtors’ book may even be the company’s biggest asset.
What are the costs of credit insurance?
The cost of credit insurance is directly linked to the risk to which your business is exposed and to the amount of turnover you wish to insure. It also varies in relation to where your customers are located, your track record in credit management, the nature of your customers, and the sector in which you trade.
Typically, you will pay a small fraction of one percent based on sales volume. Most credit insurance is sold on a whole turnover basis, or the whole debtors’ book. Insuring selected invoices or customers will cost more.
Many companies pass these costs on to their customers. Whether or not you pass this expense on, the price of credit insurance is relatively small compared to the additional business you can secure by extending competitive credit terms while also protecting your sales against bad debt.
Remember, however, that credit insurance must never be used in place of a comprehensive credit management policy.
Credit insurance providers