Credit Insurance could be considered as an “early warning system” that you can’t buy anywhere else, as it is based on real time, real trading reporting and enables underwriters to react quickly to help you manage potential credit problems.
Following the exceptional issues of 2008 where underwriters were criticised mercilessly for pull limits and price hikes, the industry had to improve or fade away. They came back fighting and improved their information flow between underwriters and the companies where they have exposure running. Despite the economy spluttering along with the odd green shoot, pricing has improved and competition is fierce between underwriters.
This has meant companies now have an excellent choice when considering credit insurance. With cost effective pricing and flexible structuring, the real battleground for underwriters is in who can write the limits you need at the level you need.
Credit Insurance is designed to work alongside your existing credit control so as not to increase your workload but can be a very strong incentive to get slow payers to pay on time as no one will want to be reported as a slow payer. With some underwriters, collections are included in their policy, so this will add even more weight to your credit control function as you can pass any overdue accounts over for them to collect if you want to.
There are numerous ways to structure a policy. The traditional way is to protect all of your sales under a “Whole Turnover” policy, but if that’s not for you there are “Top Account” policies or “Thresholds”, where cover starts above an agreed level. Another alternative is a “Catastrophe” policy, where you take a fixed level of losses then the policy kicks in to cover losses above this level.
For the larger companies it is possible to have non-cancellable credit limits or even Trigger Limits where a limit is given but if a certain event or rating happens, it will trigger a review with you and the underwriter in that limit.
If you trade with a lot of smaller or non-Limited companies, then you may find limits are difficult to get. To address this, you can use a “Discretionary Limit” that allows you to underwrite your own limits up to a pre agreed level based on either a status report or good trading experience without referral to an underwriter. This means that a limit cannot be cancelled by an underwriter; the only way it is cancelled is if you do it or they are late paying an invoice.
Credit Insurance offers excellent security to what is generally a company’s biggest asset, ie: its Book Debt. As this is often overlooked, it is worth pointing out that Banks and funders take a lot of comfort from credit insurance and some even insist on it as security for an overdraft or Receivables Finance. The policy can be assigned to a financier often helping reduce rates offered for funding as the security is enhanced.
With Corporate Governance being an important topic for all company Directors to be aware of, credit insurance must really be considered as an option to show you have done everything in your power to protect the company against the unforeseen bad debt and protect you against the Domino Effect, if one very large company goes, it can take a numberof suppliers with it.
A full market review is without cost or obligation on your part. All that is required is a short one page questionnaire, a brief chat for the broker to get to know your company and what you would like. The broker will then review the market for price, structure and limits and come back to you with findings for you to make a decision. A review will allow you to see what is available to you and allow you to make an informed decision on its merits or benchmark any existing facilities you may have either direct or through your bank.
Your own policy is always the best way as a funder’s policy is usually not competitive on price and is structured in their favour not yours. With your own policy you have the broker to support you and direct access to underwriters if you would like to discuss a certain limit.
As mentioned, finance is closely related to credit insurance and the broker can also offer a review of what funding options are available together with the costs and structure, to ensure you do have the most competitive facility available. This is very important as following the Brumark ruling a lot of companies were strongly encouraged to move from Overdraft to Invoice Finance, not because it helped them, but because it gave the bank more security. Companies felt they had little choice and that the bank had them “over a barrel”. This isn’t the case and companies are getting wise to this, reviewing their invoice finance and other facilities to ensure they do have the best deal. Again this is where a broker can help without cost or commitment on your part to review.
Features and Benefits of Credit Insurance
- Early warning system
- Grow sales with stronger companies so use it as a sales tool to grow accounts.
- Target new markets or launch new products with customers you don’t know but have protected against non-payment
- Offers cover in most countries under one policy
- Some policies will include global collections thus strengthening and reinforcing your credit control
- Enhance book debt security giving Funders and Shareholders comfort and allowing Directors to sleep a little easier.
- Tailored to suit your own unique needs
- Easy to use on-line systems with simple administration
- We are with you to support with any credit limit issues and help with all overdues and claims
- We provide a team to offer guidance on all aspects of the policy and with a low turnover of staff we build strong partnerships with our clients
- Complete the sales cycle and remember that famous saying that “all sales are gifts until they are paid for”
- Make sure your funding is working for you and not supporting past mistakes made by the funder
- Competition is very strong in the finance market a switching funders is a lot simpler now a review provides peace of mind knowing that you have the best possible facilities for your company
With thanks to:
Steve Parsons, Associate Partner, Rycroft Associates LLP