Good credit insurance could help with 'bad debt'
Nigel Burney, the regional director of Trade Credit Brokers NI, looks at the importance of insuring against things going wrong
Published 19/04/2011 | 08:00
One of the biggest and potentially fatal risks to any company's survival is unforeseen "bad debt".
There is no doubt that during a time of economic downturn and extremely challenging trading conditions, the chances that at least one of a company's trade debtors will default in payment increases very significantly and this will inevitably put an enormous strain on cashflow. However, there is no need for companies to put themselves in such a perilous situation as they can protect themselves against this risk by taking out credit insurance.
Although trade credit insurance, covering both domestic and export sales, has been available for a long time many misperceptions about the product still exist such as "it's expensive, labour intensive and underwriters will only cover undoubted buyers".
Credit insurance has developed significantly in recent years into a very straightforward, cost-effective and flexible risk-management tool.
While every company would like to be paid "cash in advance" the reality is that, in a competitive marketplace, that's a luxury few can enjoy; it's often the supplier who offers the most attractive credit terms who is most likely to win the contract and credit insurance will provide the protection against the risk of non-payment that can arise during the credit period between parting with the goods or providing the service, and the due date of payment.
Trade receivables - money owed to a company - can be one of their largest assets and protecting them should come as naturally as insuring any other business asset. However, an irrecoverable trade debt can soon turn from an asset to an unwanted but, by virtue of credit insurance, an avoidable liability. Very simply, if a company operates on a 10% profit margin and suffer a trade debt of £10,000 they will need to make further sales of £100,000 just to recoup the lost capital.
When considering a request to provide cover on a buyer, a credit assessment will be carried out by the underwriter and, because of their access to the latest market intelligence, a clear picture of a buyer's credit worthiness will emerge which will allow the underwriter to decide if it is an acceptable risk.
Another important element of a credit insurance policy is the debt collection service which is provided by most of the major companies. When a credit insurance company is asked to try and collect an overdue debt they will normally do so in an aggressive manner. Recovering a potential "bad debt" and getting paid as quickly as possible is an enormous benefit to a company making credit insurance a cashflow, as well as a risk-management, tool.
In Northern Ireland a large proportion of indigenous businesses operate in the small to medium-sized sector and in order to address their requirements Atradius, one of the largest global credit insurance companies, have launched a simple and modestly priced policy covering domestic and export trade.
With the forecast for bankruptcies and insolvencies in Northern Ireland to increase during 2011 it is vital for companies selling on credit terms to have a prudent risk-management strategy and credit insurance can certainly provide one of the best means of protection against "bad debt".