A large proportion of businesses offer credit terms on the goods and services they sell. These companies, whether large or small or in any industry, are at risk of their customers defaulting. Unfortunately, it doesn’t matter how well they manage their finances internally. It’s the customer’s financial position that determines their ability to pay for the goods or services rendered.

I believe that for a large chunk of businesses, their most significant asset is their debtor’s ledger. That’s the money that their customers owe them. The chances are that you’re a small business owner, or know someone who is. You’ll understand that most small companies manage and usually budget for minor payment defaults regularly. However, many also assume that their largest customers will always be able to pay, until one day, they can’t. If your largest customer suddenly couldn’t pay you, how would that affect your business?

Most businesses will have key man insurance, professional indemnity or public liability insurance. But how many have considered trade credit insurance? A trade credit insurance policy may protect your business from a substantial loss. It’s possible that one major customer defaulting could sink your entire business. Therefore, it pays to understand precisely how this type of insurance works and assess its suitability for your situation.

How Trade Credit Insurance Works

Primarily, trade credit insurance works by protecting your business’s cash flow if a debtor does not pay. This situation could occur for any reason, perhaps the debtor has become insolvent or is simply refusing to pay what they rightfully owe you. Unfortunately, these situations do happen from time to time. Trade credit insurance exists to give businesses peace of mind that their cash flow is protected in the event of a non-payment. Without this, companies may need to borrow money or sell assets to fill the resulting cash shortfall. This situation is all too common. However, it’s preventable by taking advantage of an insurance policy ahead of time.

Who Should Consider Trade Credit Insurance?

If you take payment upfront, trade credit insurance is not for you. However, any business that provides its customers with terms of credit should strongly consider this type of coverage as an option. While you may not have the scale or need for it immediately, it’s worth understanding so you can enjoy peace of mind as you continue to grow. It can be used by all types of businesses, even those that trade with international customers. As a risk management tool, trade credit insurance is a great way to protect risk factors that lie mostly outside of your control. No business can escape from all bad debt. Your cash flow is essential – defend it!

It Does More Than Just Protect Your Cash Flow

The benefits of credit insurance go beyond mere compensation. Having confidence in everything you do is essential to operate a business successfully. Credit and risk management often gets overlooked until it’s too late. Most people realise the importance of protecting physical assets, such as property or major equipment, but don’t consider their debtor ledger in the same way. By implementing trade insurance, you can have confidence in your credit management practices – even if you do miss something or a customer defaults out of your control, you’ll still be covered. Peace of mind alone can be an invaluable asset.

Support Expansion and Increase Your Borrowing Power

Credit insurance can also be a powerful tool for expansion. Firstly, you have more cash flow certainty, knowing that any defaults will be covered. This peace of mind makes it easier to plan and execute any further development of the business. Secondly, you’re empowered to offer more favourable trading terms to your customers, knowing that you’ll get paid regardless. This offer can be a powerful bargaining chip – it may encourage a potential customer to choose your business over a competitor.

“Trade credit insurance may give your business a higher borrowing capacity to invest in growth initiatives”

Utilising trade credit insurance may boost your borrowing power. This ‘bonus’ is because a large portion of banks will consider this insurance as collateral security when providing financing. Usually valid for both domestic and international sales, access to more funding is almost always a good thing. Due to this, trade credit insurance may give your business a higher borrowing capacity to invest in growth initiatives.

The Key Takeaway I Want to Leave With You

Having owned and worked in small businesses for decades, I can assure you I’ve seen far more than most. I’ve witnessed horror situations where good business people have been blindsided by a significant customer’s unfortunate situation. The impact on their cash flow was damaging, sometimes terminally so. I hope you now have a greater understanding of this risk and learnt a bit about the role of trade credit insurance in preventing such an instance in your business. Here’s a little bit more from me:

If you’d like to discuss further, you’re welcome to give me a call or send me a message on Linkedin, Facebook, Instagram or Twitter. Until next time,