Trade credit insurance-what is it and does my business need it?

Trade Credit Insurance – What is it and why does my business need it

In the current economic climate, Trade Credit Insurance is a real talking point in the business world with the risk of bankruptcies and insolvencies growing by the day.

If a business goes bump, it has knock-on effects on other businesses who are left with unpaid debts, which can lead to further cash flow issues and even bankruptcies to their supplier. Here is some information on how businesses can protect this growing risk by taking out Credit Insurance.

What is Trade Credit Insurance and how can help your business?

Trade Credit insurance is designed to protect businesses if a customer does not pay their debts that they owe for a product or service. There are many reasons why customers may not pay their invoices, such as bankruptcy, a miscalculation or a temporary setback. Credit insurance helps protect your business against these risks of non-payment and helps to minimise the financial loss, and allows your business to safely and confidently operate and grow.

The types of Credit Insurance that are available are a complete portfolio cover that covers all of your customers, you can cover individual customers or you can arrange bespoke cover for a particular project for instance.

How does Trade Credit work in practice?

Depending on which insurance provider you go with, you would expect your credit insurance to provide these 3 basic services:

  • Customer Information – Before entering into a contract/agreement with a new customer, you can credit check them and get up to date detailed information and advice about that company, including what the payment patterns are like and whether and how to trade with them. This would also be continually monitored so that if your customer’s situation changes to something you would otherwise be unaware of.
  • Debt Collection – If payment is not made then there is a debt collection service conducted by the insurer to retrieve the outstanding amount.
  • Compensation – If the money is not able to be retrieved then the agreed amount will be paid to the business by the insurer.

Why is Trade Credit Insurance so important now?

Whilst we were all no doubt glad to see the back of 2020, sadly the effects of its impact on the economy will continue to be felt during 2021 on beyond. Despite the positive news with regards to the vaccine rollout, economists still predict that 2021 could be a record year for insolvencies due to the ongoing Pandemic, and this isn’t even taking into consideration the potential impact that Brexit may also make.

Many distressed businesses are managing to keep afloat by making use of the high level of government support available, however, as government schemes begin to come to an end and cash reserves become scarce many businesses may struggle to stay afloat.

Insolvencies have typically increased year on year over the last few years and this trend looks to continue. We can definitely expect the numbers to rise again once the economy restarts with further insolvencies forecast.

Here are some stats and Forecasts from one of the leading credit insurance providers in the UK Euler Hermes:

  • Insolvency Forecasts – 31% increase in insolvencies in the UK during 2021 and 25% in 2022
  • Profit Warnings – These are at a 30 year high, mainly due to current leniency by HMRC, temporary restrictions on Winding-Up Petitions and emergency State support measures due to conclude by the end of H1-21
  • Recession – With a national debt pile of more than £2trn, the economic decline has led to an estimated 593,000 business classing themselves as being ‘significantly distressed’
  • Bad Debt – 40% of SME companies believe they will have a Bad Debt in 2021
  • Non-Payment – 38% of SME companies are still waiting for payment on work completed prior to the first Lockdown in March 2020, with an average balance outstanding of £59,000
  • Late-Payment – 25% of SME companies have already written-off money owed due to Bad Debt from 2020, with an average value of £25,000

The number of SMEs in the UK under significant distress now stands at 620,000 an increase of 23% increase since Q1 2020. In the last quarter alone, there has been an increase of 14% or 76,000 businesses in distress.

Even with government support, some businesses will not survive if lockdowns are extended or further lockdowns imposed in the near future. At the end of April, 33% of businesses will be forced to shut, this increases to 37% if lockdown continues until the end of May, and 42% if it goes on until the end of the summer. A further 25% will continue to operate but make no profit.

Naif Hanash, Euler Hermes Commercial Development Manager, told us ‘it is key to remember that our business model, and more generally Credit Insurance, is based on anticipation/prediction and adaptation. Therefore, we have always been prepared to support business during crisis situations. Our ability to source up to date financial and payment information is more critical now than ever, particularly for a Supplier wanting to know if a Buyer is ‘good for the value of £X’ and especially when buyers seek longer Terms of Payment.’

If you would like to check your businesses exposure to bad debt, to see what rating one of the leading credit insurance providers would give you on your clients to allow you to trade with greater confidence you can follow the below link for your free credit analysis with our partners Euler Hermes.

For further information on how JPM insurance can help please contact us on 0121 270 4800.

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Written By Wes Griffiths