Credit insurance - inoculating your business against bad debt
Covid-19 has seen us all take steps to protect ourselves and those around us.
But with economic commentators widely predicting that the pandemic will drive up insolvency rates, have you taken action to protect your company's financial health?
It's an important question, not least given that England faces imminent lockdown, with restrictions already in place in Northern Ireland, Scotland and Wales.
Earlier this year R3, the trade association for UK insolvency and restructuring practitioners, found that 94% of its members expected insolvencies to surpass last year's figures.
Browse the headlines on any one day and you're more than likely to read a tale of corporate economic woe. It may be yet another business failing or a company struggling to the point that its advisers are mulling restructuring mechanisms such as company voluntary arrangements.
Research by professional services firm, EY, also found that, here in the North West, the number of listed companies issuing profit warnings soared by 72% year-on-year in the first nine months of 2020.
A further complicating factor is that from 01 December, insolvency law is changing. That date will see the return of 'Crown Preference' with HMRC again becoming a second preferential creditor in insolvencies. This will mean that when it comes to collecting certain debts - most notably VAT, PAYE and NI - the taxman will jump the queue ahead of suppliers and lenders.
How can credit insurance help?
Credit insurance (also known as trade credit insurance) is specifically designed to protect businesses against the failure of their customers to pay their bills. It can also cover substantial delay of payment, a delay which may have been triggered by a cashflow crisis, with the potential knock-on effect causing further crises down the supply chain.
This chain reaction is what can make credit insurance such an invaluable protection.
Whilst you may be confident in the financial health of your own business, if a client - or even a client of a client - takes a turn for the worse, your company could become infected.
You can think of credit insurance as being a bit like a vaccine. It can inoculate your business against bad debt.
In some ways it's even better as it can not only be a curative, but preventative. That's because many credit insurers will pro-actively monitor the health of your clients as a policy benefit. This means you can get an early warning should a customer show symptoms of financial malaise.
Credit insurance is also widely accepted as security for finance. This could prove increasingly important as the general outlook and return of Crown Preference may well mean lenders tighten their purse strings.
Indeed that HMRC move has caused widespread consternation among restructuring specialists who fear floating charge finance will be harder to secure.
Businesses with credit insurance may find it not just easier to secure working capital, but, in recognition of the prudent protection in place, access advantageous rates.
Credit insurance works
The Association of British Insurers found that last year, when record bad debt was recorded, the value of claims rocketed by well over 200%. The average pay-out was £67,500.
It is, however a specialist field, requiring careful risk assessment. You'll not be surprised to hear that we would strongly recommend talking to a commercial insurance broker with suitably specialist expertise and experience.
He'll also be pleased to send you a copy of our new publication, Credit Insurance in the Covid Age.
If you'd like to start that conversation then you can give RBIG's Dave Hevicon a call on 0161 304 5057 or click here to drop him an email.