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How trade credit insurance protects businesses with accounts owing

Published 08 June 2022

Trade credit insurance protects businesses from non-payment  due to debtor insolvency and protracted default events. But more than protecting your business, trade credit insurance can also help it to grow. 
 

 

What is trade credit insurance?

Trade credit insurance protects businesses against the risk of customers failing to pay for goods or services provided to them on a credit basis. Late or non-payments can lead to bad debts in harder economic times, but investment in a trade credit insurance program is a tax-deductible risk mitigation tool that can help protect your balance sheet and facilitate business growth.
 
Gallagher Trade Credit National Practice Leader Michael Woodward says that trade credit insurance can provide valuable financial protection in the event of payment default by a customer. 
 

How trade credit insurance protects your business

When you take out trade credit insurance, the potential exposure to bad debts transfers from your business to your insurer. If you don’t receive payments owed to you by customers you can make a claim on your trade credit insurance policy. The insurer typically pays out your claim within 60 to 90 days, protecting your cash flow and the solvency of your business.

But it is more than a protection tool. Having trade credit insurance also means you can grow your business by building relationships with new and existing customers, as it can make your business a more attractive trading partner to larger suppliers. 

“It can also provide lenders with the collateral they need to enable your business to obtain additional finance if a bank or other credit provider is reluctant to lend on the basis of outstanding debts,” Woodward adds. “Receivables-based financing is a very good way of supporting a business growing rapidly as the finance amounts grow with a company’s sales.” 

In some cases, trade credit insurers also provide credit intelligence tools and risk scoring or rating systems, which can give you insights into potential new customers or customer segments. 

Three examples of how trade credit insurance can help. 

  1. A business is seeking an increase in funding due to rapid growth following the pandemic, but the bank’s credit policy has tightened and it’s unwilling to provide additional funding. Its debtor balance represents about 50% of the businesses’ assets so the business insures its debtor’s ledger using a trade credit insurance policy. This gives the bank the collateral it requires to provide increased funding. 
  2. After a history of trading successfully in Australia, a business is looking to diversify by selling its product range into Asia. However, it wants to trade on very secure terms, which makes it unattractive as competitors are trading on 30-day open account terms. A trade credit insurance program designed specifically for its export activities will allow the company to grow securely while offering competitive open account trading terms. 
  3. In an industry that has experienced a high degree of rationalisation during the pandemic a business has seen two of its major customers acquired by new companies. With 30% of its sales attributable to these new customers it doesn’t know and facing balance sheet uncertainty, a trade credit insurance program is designed to cover these sales at less than half a percent of the businesses’ cost of sales, giving it confidence in its sales and customer mix.
     

Why trade credit insurance may be more important now than ever  

Government protection against insolvency and stimulus measures implemented during the pandemic has now been withdrawn, meaning the current environment presents a risky time for businesses, as recent high-profile construction industry insolvencies illustrate. 

“Trade credit insurance is more popular in times of weaker economic activity when bad debts tend to escalate,” Woodward says. 

The risky trading outlook is further exacerbated by rising interest rates and inflation putting additional cost pressures on businesses. 

“Rising interest rates mean companies with debt need to make more profit to service it. These fiscal pressures make suppliers look closer at their customer base and feel a little more nervous around company failures if debtor payments start to blow out,” Woodward says.   
 

We are here to help

Gallagher has a dedicated team of trade credit specialists who take a partnership approach to providing advice on all aspects of trade credit insurance, including developing a clear strategy for managing your risk and support in managing credit limit coverage, overdue reporting and claims handling. 

Please contact our team should you wish to discuss any aspect of trade credit insurance, including where a notifiable event such as receivership or insolvency may be applicable. 
 

Further reading

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Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective.
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