Credit insurance can be seen as a significant benefit for businesses, protecting against the risk of customers defaulting on payments.
In some cases, credit insurance can be invaluable to help businesses continue to operate by ensuring that you receive money owed, regardless of the client’s situation.
Also known as bad debt protection, your business no longer has to be negatively impacted by unpaid or overdue invoices, as the insurer will pay full or partial compensation for the incurred loss you have experienced as a result of a customer not paying their bill.
As a professional collection agency, Direct Route works with numerous businesses to help manage and support their cash flow by collecting overdue payments and outstanding invoices, as we understand businesses can no longer afford to simply write these debts off if they want to continue trading and growing as a business.
The role of credit insurance is to provide the same level of support. Helping to protect a business’s cash flow and turnover while giving confidence to expand your customer base.
What is credit insurance?
Any business with a turnover of over £250,000 can apply for credit insurance. You must provide insurers with information about your company, any loss history, and information about your current and potential future customers.
From here, insurers will evaluate the financial health of your customers and use this information to decide on invoicing periods and credit limits that should be extended to them.
Credit insurance is designed to help you do better business, acting as a precaution if your customer doesn’t pay on time or becomes insolvent during that period.
Credit insurance can cover a single risk or multiple, for example, bad debts, late payments, political risks, natural disasters, etc., and there are two main types of insurance:
- Commercial risk credit insurance – a customer is unable to pay due to commercial reasons.
- Political risk credit insurance – the customer is unable to pay due to events outside their control.
Credit insurance for unpaid invoices – the benefits
Increased sales – you can have confidence to increase your customer base, looking at new customers beyond the standard credit risk you would typically take. Providing an opportunity to explore new markets, you can now offer more competitive payment terms due to the added security your business has. Now, every sale can be within the bounds of reasonable credit risk, allowing your company to grow to its full potential.
Reduce bad debt – credit insurance to protect against unpaid invoices means risk is mitigated, and you can reduce the amount of unpaid invoices or debts outstanding. In essence, credit insurance provides protection when customers are unable or unwilling to pay; consider it a last line of defence for collecting on outstanding debts.
Improved cash flow – non-payment can have devastating consequences for businesses; however, due to the reduction in late payments and non-payments (as your insurer will pay when your customer can’t/won’t), your business cash flow will be healthier and more sustainable to support future plans.
Lower credit management costs – now, you’re no longer wasting time chasing late payments, allowing you and your team to focus on other areas of business generating revenue. (Check out our blog on the benefits of automating your invoicing process as part of your credit function).
Better banking terms – when banks learn you have taken the appropriate precautions to ensure your cash flow, they, too, become more confident in granting additional capital.
Protects your assets – credit insurance covers you from the financial losses from non-payment of invoices, protecting you against risks beyond your control. You can also extend your credit facilities while still protecting yourself from non-payment.
Insurers can take charge of the collection process – monitoring the creditworthiness of each customer and assigning a credit grade and credit limit that you can then use as part of your credit agreements/processes.
The role of credit insurance
As a business, you must balance credit risk with credit terms, with risk mitigation being the key focus.
You need to feel confident and make the most informed credit decisions for your business.
Finding out more about your customers and their solvency is key—that and choosing the right customers, the right markets, and setting the right credit limits.
This is where credit insurance can help.
They can provide all of this information for you, and if your customers still fail to pay, you will still receive the cash for the insured invoices while the insurer continues with the collection of the debt.
Lost cash flow can be devastating, and non-payment can weaken your company.
Helping you to manage your accounts receivable and compensate you in the event of non-payment, can you afford to operate without this safety net?