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Trade credit: Protecting your business with insurance

Trade credit insurance protects cash flow, profitability and reduces the risk of delays or non-payments.

16/01/2024 · 4 minute read

Protecting your company from unpaid invoices could help you stay in business. At the time of writing, latest figures indicate that the number of companies going insolvent is on track to be the highest since the 2009 financial crisis.  Findings from the dispute register identified one in five insolvencies are attributed to late payments, with 30% of invoices not being paid within the agreed terms.  

The impact of insolvency can go way beyond a firm that has collapsed. Non-payments can have a long-lasting effect on the cash flow and continuity of others in the supply chain.

Would your businesses be able to meet its obligations to your suppliers if a customer became insolvent?

Outstanding invoices – the domino effect

Many businesses operate on the ability to buy stock or services and pay for them later with trade credit.

However, when a firm runs out of cash and defaults on payments, the knock-on effect for businesses paid outside their payment terms could be catastrophic.

The impact of late payments can have a domino effect that disrupts multiple businesses. In the worst cases, it can lead to financial decline and insolvency for others in the supply chain.

The risk of compromised cash flow can be very worrying, particularly if a business cannot absorb the costs.

Trade credit insurance could protect you when your business isn’t paid due to insolvency.

What is trade credit insurance?

Trade credit insurance, is a type of cover that protects your firm from the risk of non-payment.

It safeguards your financial stability and can reimburse you for unpaid invoices, should the worst happen.

As well as protecting a steady cash flow and profitability, trade credit insurance helps you identify potential credit risks.   

For businesses wanting to borrow, it can make you more appealing to lenders, enhancing your borrowing capacity.

Takeaways

Trade credit insurance offers distinct benefits, particularly in risk mitigation, growth, and enhancing working capital.

Risk Mitigation

  • It helps protect businesses against their customers defaulting on their payments, reducing the risk of non-payment.
  • It can enhance credit management by offering insights into the creditworthiness of potential customers.

Growth

  • This insurance can facilitate business expansion by enabling companies to safely offer more competitive credit terms to new and existing customers.
  • It increases confidence in exploring new markets or expanding the customer base without fear of significant financial loss.
  • It helps secure better bank financing terms, as insured receivables are often viewed as more secure collateral.

Enhancing working capital

  • Trade credit insurance helps to improve cash flow by protecting against late or non-payment, ensuring more predictable income streams.
  • It can lead to improved borrowing terms, as lenders may view businesses with insured receivables as lower risk.
  • It allows businesses to release capital as a buffer against bad debts, reallocating resources for growth and operational needs.

Trade credit insurance gives you the confidence to pursue new business opportunities. This is particularly reassuring when engaging with new customers. Knowing you’ll receive payment, even in scenarios involving late payments or insolvency, you can have peace of mind. 

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