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.
How does trade credit insurance for SMEs work?
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.
Benefits that trade credit can deliver for your business
- You can benefit from more insight into your customers' ability to pay by having an insurer run a check on any potential credit risks. A credit insurance policy can give you greater access to information than you could obtain from other channels: such as financial information and your insurers reporting requirements.
- Policies provide debt collection services which may obtain outstanding payments without the need to set a claim in motion.
- Trade credit insurance can assist with obtaining access to financing by supporting and strengthening access to credit from a financial institution that can be named as a loss payee in the policy.
- It also enables businesses to extend greater credit limits to more customers on more favourable terms and to spread business credit risks across a wider pool of debtors, allowing further expansion and more effective risk management.
- The premium paid on a trade credit policy is tax deductible — and provides access to a greater reserve of funds than your business would normally carry.
- If you do need to make a claim the debt loss can be recovered in a timely manner, reducing the disruption to your balance sheet.
Which industry sectors face greater trade credit risks?
Insolvencies can be unpredictable, but some industries are more vulnerable than others. Sectors that may strongly benefit from trade credit insurance protection include:
- construction
- food manufacturing
- agriculture
- transport
- solar
- labour hire.
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.
How Gallagher can help
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.
