Why more small businesses should take out Credit Insurance

Trade Credit Insurance has become an increasingly important part of many businesses’ risk management strategies since it was first developed at the close of the nineteenth century. The sector has grown significantly during this time, as more and more companies have taken up the service, and three main providers have now emerged – Euler Hermes, Atradius and Coface – all of whom focus primarily on Europe, which remains the single largest trade credit insurance market.

But despite the penetration that credit insurance has achieved in Europe as a whole, a 2013 report by the consultancy firm Bain & Company found that only 10-20% of the continent’s SMEs currently utilise this business tool.

credit-insurance-1I believe this to be a real missed opportunity for many small businesses.

The main benefit of Credit Insurance is self-evident: it protects companies from the risk of non-payment by their clients for goods and services that have been provided. The insurer Euler Hermes has calculated that a business’ debtors will often account for up to 40% of its Current Assets and they make the point – borne out by the above statistic – that whilst businesses routinely insure other assets such as their property, this large asset often remains exposed.

Non-payment of a large invoice can cause real damage to SMEs. In fact, nearly a fifth of companies that fail doing so due to bad debt or a lack of working capital. £50k of bad debt to a small business with a 4% profit margin would necessitate an extra £1.25m in sales to compensate for the loss. For any business, let alone an SME, this is clearly a risk worth mitigating.

Taking out Credit Insurance can offer more subtle benefits too. Policies often provide businesses with current and accurate information on their customers, for example, allowing them to judge their financial security. More, taking out credit insurance acts to lower the risk for providers of finance, allowing businesses to borrow at lower rates of interest than would otherwise be possible.

In the current economic climate, improved borrowing opportunities combined with debtor book security is surely too good an offer to pass up.





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