The growth of any business can be both exciting and worrying. More often than not, growth would mean taking on new customers where it could be difficult to assess their ability to pay for goods and services. Reward does of course come with risk but using credit protection insurance can provide you with invaluable information, limiting your risks whilst allowing you to expand with confidence.
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At Factoring & Finance Review we appreciate that gaining new customers can be daunting as it can be difficult to assess their ability to pay for your goods and services. However, there are ways in which a business can expand whilst still minimising losses and taking a more calculated risk when granting credit terms.
We aim to assist our clients by helping them acquire the tools needed to grow their business with confidence eliminating as much risk as possible. With this in mind, we help our clients access credit protection through one of our approved market leading credit insurers..
Credit protection is basically “Bad Debt Insurance” that helps to protect businesses against loss of revenue from non-payment of commercial debt such as customer Insolvency* and protracted default*. It provides a greater peace of mind when offering credit terms and makes sure that your invoices will be paid and allows you to reliably manage the commercial and political risks of trade.
While credit protection indemnifies losses incurred from non-payment of commercial debt, the ultimate goal is to help your business avoid catastrophic losses and grow profitably. The key is having the best information about companies, sectors and economic trends to make informed credit decisions and therefore avoid or minimise losses.
Unpaid invoices can represent up to 35% of a company’s assets and if customers fail to pay it could have a detrimental impact on your ability to trade. Unpaid invoices are often caused by insufficient knowledge of a customer's solvency, made more difficult in the UK due to the limited filing requirements in place at Companies House.
Utilising the knowledge of a credit insurer helps you pick the right customers, markets and credit limits in order to avoid and minimise non-payment of commercial debt. As a result, you will have a greater confidence in extending more credit to current customers and pursuing new, larger customers that would otherwise seem too risky. If your customers fail to pay, the credit insurer will take care of the debt collection and forward you the cash for the insured invoices at an agreed point in time.
If a Company’s profit margin is 5% and one of its customers defaults on debt of £100,000, the company will have to produce additional sales of £2,000,000 in order to make up for the lost profits.
A credit protection policy helps manage your account receivables and compensates you in the event of non-payment. More importantly, the lost cash-flow could be devastating. Non-payment weakens your company and lowers its investment capacity.
Once you agree terms with your chosen supplier, they will generally make an assessment of your debtors’ credit worthiness and allocate them an insured credit limit. This will allow you to trade safely with them up to the amount of the limit.
At any time during the policy’s life, you may request additional cover for trade with any of your customers, should the need arise. The service provider will continuously monitor each of your insured customers and will evaluate the risk of increasing the cover and either approve the additional credit limit request or decline it with a clear and timely explanation. You can also request a credit limit for a new customer that you would like to start trading with.
It is the service provider’s responsibility to proactively monitor the credit worthiness of your customers. They do this by gathering information about your customers from a variety of sources, including visits to the customer, public records, information supplied by other policyholders that sell to the same customer, receipt of financial statements and past due reports.
This information is constantly being updated and cross referenced. If the information indicates one of your customers is experiencing financial difficulty, they will notify you of the increased risk and help you establish an action plan to mitigate and avoid loss.
While credit protection indemnifies losses incurred from non-payment of commercial debt, the ultimate goal is to help your business avoid foreseeable losses. If a loss does occur with an insured customer, the service provider will indemnify the loss up to the policy’s credit limit.
A customer is considered to be insolvent when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts as they become due, or is insolvent within the meaning of the Bankruptcy Code.
This is when a customer has not paid and is past the payment due date. This is usually triggered at 60 to 90 days past the payment due date. (Clarification should be sought from the credit insurer as to the exact date that they consider a customer to be within the protracted default period).