By Euler Hermes
Credit insurance is an area that many small firms may not immediately be familiar with, but it is finding favour among a growing number of SMEs seeking growth opportunities both at home and abroad
It has often been incorrectly perceived as the preserve of larger corporations which trade internationally; credit insurance is a way for all businesses to protect themselves against the risk of non-payment.
Debts that ‘go bad’ can cut off cash flow just when growing firms need it most and with UK plc bouncing back from recession, no business should be letting that risk stifle their ambitions to expand.
Historically, credit insurance policies have often been seen as being too costly and complicated to administer for smaller firms, particularly when trading conditions have been relatively stable.
But there are increasing options for even the smallest of SMEs to protect against non-payment caused by a sudden or unexpected insolvency to provide peace of mind with a minimum level of hassle.
New research by the world’s biggest credit insurance provider, Euler Hermes, found that the number of global insolvencies will fall by around eight per cent in 2014.
This is the fifth consecutive year of falling insolvencies, which sounds reassuring, but to put that into context, the forecast level of insolvencies is still 23% above that seen before the financial crisis.
We are clearly not out of the woods yet, so how does credit insurance help a firm hedge against unexpected insolvencies among its customer base while making the most of the growth opportunities that are emerging?
How it works
Choosing the right policy is an important consideration for SMEs, as the option needs to fit with the requirements of an individual business. Euler Hermes has spent time getting to know its customers and what they need, and have devised a product specifically for small to medium sized businesses. It is called Simplicity.
With this product, a typical policyholder will pay a fixed premium calculated on their annual turnover to protect against bad debts.
The insurer will commonly insure them for a defined percentage of any debt up to a maximum claim per customer, which is again calculated from the policyholder’s turnover.
Some insurers, including Euler Hermes, which every year provides cover for transactions worth more than £789 billion sold on credit to businesses worldwide, can boost the level of cover if the policyholder applies for a ‘grade’ and their customer is assessed as an acceptable risk.
A grading means a company is assessed on its durability and ability to pay and given a grade from one (very low risk) to ten (insolvent).
This gives firms an invaluable insight into their customers, helping them manage risk much more effectively.
The insurer will warn customers if their trading partner’s grading changes so decisions can be made on the very latest information available.
A Solution with Simplicity
One SME which has benefitted from taking out credit insurance and is now confidently planning for future growth is West Midlands welding equipment supplier, Forgeweld.
Managing Director, Kevin Carter, took out a credit insurance policy called Simplicity from Euler Hermes, which was designed specifically for smaller firms with challenging customers.
He was attracted to Simplicity because it required no more administration than a motor or home contents insurance policy, but provided a level of protection that helped him sleep more comfortably at night.
He said: “We have many customers who owe £1,000 here or £3,000 there and it only takes a handful of these debts to go bad and you can end up being owed quite a bit of money.
“When there is that doubt hanging over you about whether you will be paid, it can change how you feel about taking on a new account.”
He added: “Simplicity is simple to understand, simple to implement and simple to use.
“It gives me the confidence to grow my existing customers and take on new business knowing that even in the very worst case scenario, I will get a large percentage of my money back.
“Euler Hermes does everything: they monitor my accounts and notify me of any significant changes in risk so that I can make better-informed decisions about the way we do business.”
Confidence to Grow
While improving economic conditions mean UK businesses of all sizes are seeking opportunities to grow, they also need to have confidence in their new and existing trading partners.
For any business owners looking to export — or simply to grow domestically — credit insurance is certainly something they should consider to make sure they are not left vulnerable.