If your business supplies goods or services on a credit basis you’re open to the risk of the buyer not paying, which means you’re probably already familiar with bad debts.
These bad debts can be detrimental by:
- Disrupting your cash flow;
- Weakening your balance sheet; and
- It can ultimately take management time away from your business.
At Ledge, we receive a number of concerns from business owners around the issues of non-payment and the impact this can and will have on their cash flow and balance sheet. Most of these businesses recognise the risk, however some still deem trade credit insurance to be too expensive, complicated and unnecessary.
However, if you run a SME and one of your largest clients fails to pay, having credit insurance could be the difference between your business surviving or becoming insolvent. For example, if you are a subcontractor, whilst you may be very comfortable with the party/company you are contracting to, you won’t necessarily know the status of other parties who are directly or indirectly involved in the contract. It is the unforeseeable risks which often blindside us and whilst we can’t control or prevent them, we can insure against them.
So, how does Trade Credit Insurance work?
It’s a policy that’s designed to act as a safety net against unexpected losses and it may also help you avoid losses altogether. The policy can be structured in a way that is tailored to the demands of your business and the sectors in which you operate. Depending on what type of cover you have, the policy can protect up to 90% of the insured balance owing (minus your deductible) to ensure that your business can continue to operate with minimal disruption.
Benefits of Trade Credit Insurance
- Protects your receivables against bad debts
- Preserves your liquidity
- Allows you to have the confidence to expand your business
- Improves your business’s credit management
- Add security – trade credit insurance is recognised by banks, and shareholders are also reassured that their assets are protected
How do you know if Trade Credit Insurance is right for you?
If you’re a business owner who:
- Has customers that are taking longer to pay invoices;
- Is worried about clients not paying, or;
- You’re looking to expand into new markets and take on new clients.
Trade credit insurance is suitable for you and your business.
Trade Credit Insurance Case Study
- Construction company with $5 million turnover
- The trade credit insurance facility cover costs $12k plus tax per year
- The client incurred a bad debt of $150k which would have put a strain on the business’s cash flow
- Insurance covered 90% (less deductibles)
- Trade credit insurance protected the company’s cash flow and gave them confidence to continue to trade through a difficult economic climate. In the end, $12k was worth it as it saved the business $135k (less deductibles).
Although credit insurance may seem expensive it can save businesses in unforeseen circumstances which is why it’s applicable for all sized businesses and market sectors.
To find out more on the many facilities available contact your Ledge Finance Executive today or simply click here to contact us.
For more regular updates:
You may also like: