The importance of credit insurance
When you purchase a credit insurance policy, you are doing so much more than simply signing a document.
Although all insurance policies have the same purpose (protecting something important to you from the unexpected) it could be argued that credit insurance protects you from something that no business would ever wish to foresee or even expect – their customers being unable to pay them.
What is credit insurance?
Credit insurance minimises the risk of your business being harmed by customer insolvency.
Did you know that, on average, unpaid invoices and late payments cost UK SMEs a combined total of £250bn per year? This figure is made up of the typical value of invoices and the cost of time wasted when chasing such payments. The impact of this (especially on SMEs) can be devastating and financially ruining.
In the event that your customers cannot pay off their debt to you, credit insurance financially covers your business and keeps you safe from financial disturbance. The insurance provider will likely also monitor the financial well-being of your customers regularly so that no bad news should come as a shock.
Credit insurance is the only type of insurance policy which will give you reassurance when taking on new clients.
In general, credit insurance will cover two main risks – commercial risk and political risk.
Commercial or political risk
Commercial risk refers to customers who are unable to pay debts as a result of financial difficulty such as insolvency.
Political risk is just about every other possible scenario that could leave someone unable to clear their debt. This can include disasters such as hurricanes and earthquakes, or political and economic disrupt such as war or currency shortage.
Short-term accounts receivable (payments due within 12 months or less) will be covered by credit insurance.
Arranging a credit insurance policy
When arranging credit insurance, you will need to set a coverage limit for all of the customers you wish to insure.
You can cover specific customers or your entire clientele. However, we always recommend insuring the accounts most important to you, even if you believe they pose no risk. It tends to be these accounts that cause your business the most disruption if they unexpectedly face difficulty.
Most policies are custom made and based on a careful assessment of your business through which we determine what risks you could be facing in the future.
Assessing your requirements
Part of the assessment process can involve a full client analysis and will include the creation of in-depth profiles of your current client portfolio. This analysis can provide the insurer with the data they require to set up your credit insurance and will give you further insights into your business’ current client base. This data can be very valuable to your business not just in regards to your credit insurance, but also for the purposes of setting up expansion strategies and day to day client management.
The cost of your credit insurance premium will be determined by a range of factors, which can include factors such as your company’s annual turnover, the customers you wish to cover and your trade history.
What are the benefits of having credit insurance?
1- Enhance customer relationships
Your customers will feel a greater sense of control over the service you provide them with when you allow them to easily extend or withdraw credit.
2- Comprehensive protection from insolvency
Minimised risk of debt is the most obvious benefit to having credit insurance. This will save you from nasty surprises and leave you with an improved cash flow (as a result of receiving payments through us for any insured invoices that are unpaid)
3- Expand customer base
The risks of widening your business audience to include new markets, sectors and customers overseas will be reduced, therefore making it easier to expand your sales to new audiences
4- Better banking relations and funding
Banks will offer you more advantageous loaning terms if you have credit insurance – and for some banks, it’s even compulsory that you are insured before receiving a loan.
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