Small companies are often the most vulnerable to bad debts and fluctuations in cash flow. There is a perception that credit insurance for protection against bad debts is costly and hard to manage for small to medium (SME) businesses. Gallagher can offer credit insurance cover specifically for SMEs.
Example: Key client's business collapsed leaving $100,000 debt unpaid
A small business supplying raw materials to clients on a credit basis financially relied on a few key accounts. When one of their major clients suddenly filed for bankruptcy and was unable to pay their outstanding invoices, they owed the supplier $100,000.
If your business provides goods and services on a credit basis you are carrying a loss exposure if your customer fails to pay. For example, a $50,000 loss on 10% profit margins equates to an additional $500,000 in sales needed to cover this shortfall. Many SMEs use personal assets as security for their business and one bad debt can put these at risk.
Failure in payments due that trigger claims are insolvency (administration, liquidation, bankruptcy, DOCA, receivership) and protracted default (from 120‒180 days from due date).
Trade credit insurance can protect your business (and assets) in the case a customer fails to pay. Money from a claim payment gives you timely access to replacement capital, protecting your cash flow and profits.
A typical SME policy includes an excess as low as $2,500 and 90% coverage. In the case of a customer failing to pay money owed, the excess is deducted, and 90% indemnity applies. For example:
| Debt defaulted | $100,000 |
| Policy excess | $2,500 |
| Policy coverage level | 90% |
| Claim payout | 90% x ($100,000 - $2500) |
| $87,500 |
Trade credit cover can also strengthen your internal credit process by having your insurer assess your customers and alert you to high-risk accounts, helping you avoid losses. The costs of collecting an overdue debt, which can run into thousands of dollars, can be included in your credit insurance cover. The savings in these costs alone may far outweigh the cost of the premium you pay.
Insolvencies can be unpredictable, but some industries are more vulnerable than others. Sectors that may strongly benefit from trade credit insurance protection include:
Trade credit insurance can be a valuable tool for small businesses, protecting them from the risks of bad debts and payment default. By having the right insurance cover in place, SMEs can recover credit losses, maintain their financial stability and continue their operations without significant disruptions.
Example 2: Delayed payments were a credit risk red flag
A small marketing agency that provides advertising services struggled with ongoing strain on its business cash flow. One of its clients had been consistently delaying their payments for several months. Despite repeated reminders and collection efforts the invoices — $50,000 in total — remained outstanding.
Recognising this potential risk, the agency had trade credit insurance cover in place. Forced to file a claim for the unpaid invoices, the agency cited the protracted default of payment by the client in question.
Our trade credit insurance specialists have the experience to understand your risk exposures and can advise you accordingly about the cover best suited to your business protection needs.
Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.
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