Keep credit risk under control

Credit insurance can protect your business against the risk of nonpayment for goods supplied on credit. With an increase in the demand for credit, now is a good time to consider whether your business could benefit from a policy. James Riordan of Credit Risk Brokers has this guide to obtaining a credit insurance policy. 

As the economy continues to recover and SMEs struggle to get sufficient funding from the banks, there is an increased pressure on all suppliers to extend more credit and longer credit terms. This means that both merchants and distributors are being asked to take larger risks in order to meet demand.

So what about credit insurance?

Credit insurance can work in conjunction with the good credit management practices detailed in previous publications. A credit insurance policy can be purchased to protect against the risk of non-payment for goods supplied on credit, regardless of the circumstance, be it as a result of insolvency or not. Credit insurance is underwriting trade, and trade, by its nature, changes all the time. Underwriters have access now to more information, including real-time payment information that is not in the public domain. Access to this information can help you target the right customers and safely increase sales. As your debtor book can be one of the largest assets in your balance sheet, your funding partner or shareholders should be comforted to hear that it is insured, which may help in getting extra financial support.

Yes, credit insurance got a bad name during the recent downturn. Many policyholders had a large portion of their credit limits cancelled and had some claims rejected, with some insurers citing clauses in the policy permitting them to avoid payouts.

Good brokers steered their customers through these problems and managed to get claims paid and cover reinstated. Some insurers behaved better than others, but they all seem to have acknowledged that their actions impacted the public perception of credit insurance. Some have since moved to address this by including terms to protect the insured party, for example, from
immediate withdrawal of cover.

Yes, the insurer’s risk appetite is back, so we suggest if you don’t already have credit insurance, now might be a good time to explore what a policy can do to enhance a growing business. Even if you are already insured, we suggest you engage a broker that specialises in credit insurance in order to get the maximum benefit from your policy. They should be proactive in getting the right terms for you and should be there each step of the way, getting you the cover you need to meet the uplift in demand. They will cost you nothing as they are paid by the insurer for their work; just be sure to appoint an independent broker so you are getting a balanced opinion.

Many international suppliers to Irish businesses are insured as they are not willing to take the risk of non-payment. Indeed, if one or more customers owe you more than you can afford to lose, you should consider insuring. Everyone is capable of managing their own business, but can you rely on your customers being able to manage theirs?

How does it work?

After a brief meeting with a specialist broker, a credit risk analysis, including a debtor profile, is provided to the market of insurance companies. Of course, you can approach each insurer yourself directly, they all have a simple questionnaire to be completed. Your key buyers are allocated grades that reflect their creditworthiness and, based on this risk assessment, an insured credit limit is allocated on each debtor.

Based on key factors, such as your volume of credit sales, an insurance premium is determined by the insurer(s). This can be paid monthly or quarterly in advance. If you choose a policy that suits your business, the next step is to apply for cover on your full debtor book. This can be done via the insurer’s online system by you or by your broker/account manager.

Throughout the lifetime of the policy, the insured is informed of any changes to their buyers, be this a positive (improved financial information) or negative (poor payment performance with another insured party). If your buyer cannot, or will not, pay for an invoice, you are covered up to your insured credit limit for that buyer. Collection of the debt can be managed via the insurer,which enables you to focus on the customers that do pay you on time.

However, in the event that the debt is not collectable in a reasonable timeframe, or indeed if the buyer is insolvent, a claim will be paid by the insurer in the following weeks. It would be normal to be paid out up to 90% of the outstanding debt provided you had a limit in place and you reported the overdue on time as had been agreed with the insurer at the beginning of your policy.

This Business Support article featured in the September/October 2016 edition of The Hardware Journal.