If you are in the business of selling goods to other companies, then it is normal business practise to offer the purchasing company credit terms once they have established their credit worthiness. Occasionally, a purchaser will default on their payment by going into liquidation or delaying payment of the debt. This can be a very bad for your company. It causes problems with your cash flow and can even put your own business in jeopardy.
Having the right insurance in place for your business is important and can help soften this blow. It is possible to buy trade credit insurance to protect your company against the risks in given credit. Having the insurance also allows you to extend the credit terms for your customers to encourage them in their business relationship with you, and gives your bank security if you need working capital. Trade credit insurance is big business and very important to the UK economy. In 2008, £302.5 billion of total turnover was subject to credit insurance.
The three largest trade credit insurance companies are Euler Hermes, Coface and Atradius. Before offering trade credit insurance these companies will undertake a detailed risk assessment and you will need to supply information from your company including management accounts, business plans, cash flow projections, funding and banking arrangements, and capital expenditure plans.
Recently, because of the current financial climate, the insurance companies have reduced the amount offered in insurance cover, fearful that many companies may be in financial difficulties. Indeed, the statistics bear this out, comparing the last quarter of 2007 with 2008, trade credit insurance claims have increased by 51%. Total claims for 2008 was £360m.
In order to help UK business and to inject confidence in the economy, the Government announced in the recent budget a scheme supply a top-up for trade credit insurance. Full details of the scheme can be found on the Business Link website.
Alternatives to trade credit insurance is debt factoring and invoice discounting.
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