“This is a tough time to be in business and it is not getting any easier. The collapse of Carillion was one of a number of high-profile major insolvencies, which dramatically highlighted how the ripple effect of a company failure can have a devastating impact throughout the supply chain. The commercial environment remains a challenging one for customers, suppliers and insurers.
Never has the importance of trade credit insurance been greater – the survival of any business could be at risk without it. With too many firms at the mercy of non-payment of debts, the time has come for trade credit insurance to become an essential part of every business’s contingency planning”. – Mark Shepherd, Assistant Director, Head of Property, Commercial and Specialist Lines, Association of British Insurers.
Whether it be the current economic climate or the impact of the collapse of Carillion, which is still unknown, bad debt in the construction industry and those related industries is on the rise; the statistics speak for themselves:
- Bad debt owed to UK companies rises by over 367% in Q1 of 2018.
- Construction businesses going into receivership increased by 73.3% in the first 3 months of this year. *
- Bad debt owed to the construction industry in the first 3 months of the year totalled £16,997,825. *
- Debt owed by the construction industry to contractors, suppliers and other companies in the same period was over 6 times that – £100,181,901.
- 60% of sub-contractors have been exposed to bad debt in the last 12 months **
- The number of trade credit insurance claims received in Q1 of 2018 was up by 50%, the highest number of new claims since Q3 2009. ***
- Corporate insolvencies increased 13% from Q4 2017. ***
A bad debt of £100,000 on a profit margin of 5% would require an additional turnover of £2,000,000 to offset the loss. For a larger business this could wipe out a year’s profit, for a smaller business it could mean insolvency.
How can you protect your business against the potentially devastating impact of unpaid debts?
Trade Credit Insurance protects businesses against bad debts caused by the insolvency or default of business customers, following the sale of goods or services on credit terms in both domestic and export markets.
There are a number of different types of credit insurance solutions, that exist for the varied requirements of businesses extending credit to their customers.
A Whole Turnover policy – covers your entire turnover against insolvency and default.
A Single Risk Policy – Focuses on one key buyer, the concentration of risk is much greater and therefore not offered by all insurers and policies are often subject to minimum premiums.
A Key Account Policy – “Top up” credit insurance allows existing credit insurance policy holders to secure additional cover on either one or a selection of buyers, where their existing insurer is unable to provide the required level of cover. There are normally minimum criteria for this type of policy.
Catastrophe/excess of Loss – This policy suits a business with a turnover in excess of £10 million turnover that have effective credit control procedures in place. The credit control procedure is underwritten and insurers would seek a greater share of the risk with the policy holder.
The benefits of trade credit insurance are far reaching and can have an impact on how you provide credit to customers in the future;
- Credit insurance provides quick access to replacement capital without harming your balance sheet.
- Access to high quality information in order to help you make informed decisions when granting credit to customers.
- Access to finance facilities such as invoice finance and factoring is greatly improved, owing to the extra security afforded by a credit insurance policy,
- There is the option to include pre-legal and legal collection of defaulting debtors – often included within the premium to help with slow paying customers for insured and uninsured debt.
- It removes the need to keep a bad debt reserve, meaning these funds can be utilised elsewhere; perhaps to invest in your business.
In short, Trade Credit Insurance is a straightforward way to ensure that you get paid for the goods and services you supply and protect your bottom line. Whether you are looking into Credit Insurance to support funding, have a greater understanding of your customers financial position, or to just protect your company from bad debt it should always be part of your risk mitigation considerations.
* Source – Credit Safe’s Watchdog report
** Source – Study by Bibby Financial Services and the Vinden Partnership
*** Report from the Association of British Insurers (ABI)