Trade Credit Insurance for SMEs – What You Need to Know
How does Trade Credit Insurance benefit SMEs? In this blog, we’ll run through everything you need to know about SME credit insurance.
In a difficult economy, it’s important that your business is as protected as possible.
If you offer credit to your customers/clients, what happens if they become insolvent? Can your business absorb the hit of an unpaid invoice?
It’s easy to keep our heads in the sand, but with insolvency rates incredibly high, some experts are predicting that 2024 could see 35,000 businesses enter administration.
Think of your customer base – are there any customers/clients that you’re a little worried about?
You have two options – ignore the risk of client insolvency and hope nothing bad happens, or take proactive measures, ensuring you’re protected in the event of a customer becoming insolvent and being unable to pay.
If you choose the latter, read on!
How can SMEs protect against client insolvency?
One of the most important things for any SME that offers credit to have is Trade Credit Insurance, sometimes known as Business Credit Insurance.
In the event that a customer is unable to pay an invoice, be that as a result of insolvency or general cash flow issues, you will be compensated roughly 90% of the invoice value.
Not only this, but the approval process involves a thorough credit check on any businesses you’re looking to insure against. If your customers/clients are approved for insurance, that is a vote of confidence in their creditworthiness, meaning you can take on new business, safe in the knowledge that they are a good financial bet.
Business Credit Insurance/Trade Credit Insurance helps SMEs both proactively and retroactively. It protects your cash flow and ensures that you’re able to continue trading, even if the worst happens.
Offering credit without Trade Credit Insurance is an unnecessary risk. Don’t worry – we’re here to help. Get in touch with our friendly team today. We’re here to answer any questions you might have about Trade Credit Insurance.
How does trade credit insurance work?
In simple terms, Trade Credit Insurance can cover between 75-95% of an unpaid invoice sum. Here’s an example:
You’re an SME that’s making a 10% profit margin suffers a bad debt of £100,000 due to the insolvency of a customer. You don’t have credit insurance, so to recover that lost profit you will need to generate an additional £1,000,000 sales revenue.
If you had Trade Credit Insurance, you would quickly receive around £90,000 (subject to policy terms, conditions and excess) from the insurer to cover the majority of the lost cost. You now only need to generate an additional £100,000 in sales revenue to cover the lost £10,000 (no small amount, but a significantly better situation than without insurance!).
Whole Turnover Insurance – normally the best policy for SMEs
There are several types of Trade Credit Insurance – Whole Turnover Insurance, Individual Buyer Insurance, Excess of Loss Insurance and Surety Bonds.
However, for most SMEs, we highly recommend taking out Whole Turnover Insurance, and here’s why:
Whole Turnover Insurance provides the broadest possible protection, effectively covering your entire client base.
It’s perfect for SMEs with a diverse range of customers. Covering your entire portfolio can be more cost-effective and easier to manage than insuring individual buyers.
On the off chance that you have a small number of clients that provide the majority of your income, you might opt for Individual Buyer Insurance, but this is fully dependent on your unique situation.
Not sure what style of Trade Credit Insurance is right for you? Give us a shout, let us know your needs and we can help you decide what’s best.
The benefits of Trade Credit Insurance to SMEs
There are many benefits of Trade Credit Insurance to SMEs, including:
Improved financial security
Trade Credit Insurance almost entirely mitigates against the risk of unexpected customer insolvency.
Extending credit to your customers is inherently risky – a leap of faith for any SME. Insurance ensures that your business remains financially stable, even in the face of bad debts or customer insolvency.
Boosted cash flow
Debts and late payments loom large over SMEs, often severely impacting your cash flow. While larger enterprises can usually absorb bad debts, chances are your SME cannot. Insurance allows you to meet your financial obligations and continue trading despite bad debts.
Insights into client finances
While some insolvencies can be seen from a mile off, sometimes they happen out of the blue. You can never be 100% confident that your customers aren’t on the brink of insolvency. However, when taking out Trade Credit Insurance, your lender will perform a credit check on all of the accounts you’re looking to insure.
If your cover is approved, that’s great news! It’s your lender’s stamp of approval that your customers are relatively safe bets when offering credit.
Peace of mind
Running an SME is stressful... Understatement of the year!
Knowing that your business is protected from the risk of insolvency is one less thing for you to worry about, helping you rest easy at night and grow your business with confidence.
More expansion opportunities
Trade Credit Insurance provides confidence to SMEs looking to expand into different markets. If you’re looking to trade in a new market, being insured allows you to take on new customers without needing to worry about non-payment. It also allows you to offer credit more broadly, improving customer relationships and often increasing sales.
Promotes profitability by increasing exposure to new and old customers
Offering credit terms to customers can encourage them to spend more with you. In general, businesses don’t like spending money up front. If the option to spread the cost over months is available, we tend to see businesses opting to purchase more expensive goods, or buy in bulk.
This is fantastic news for you, but is risky without insurance. Larger purchases mean bigger exposure, which can be mitigated with, you guessed it, Trade Credit Insurance.
Stay competitive
Do your competitors offer credit terms? If not, offering credit is a fantastic way to gain a competitive edge. If they do, you risk falling behind if you cannot offer similar/better terms.
Customers will often opt to trade with a business that offers credit, even if their products are more expensive. Credit is an incredibly potent USP – one that Trade Credit Insurance allows you to offer at little risk to your business.
Need Trade Credit Insurance for your SME? Look no further
At PIB Insurance Brokers, we believe that maintaining a client-focused attitude is the key to our ongoing success.
This means putting your organisational needs above our profits. When looking for Trade Credit Insurance, there is no better choice. We work with 100s of SMEs across the UK, helping them grow and thrive, safe in the knowledge that their finances are secure.
With PIB, you’ll have a dedicated account executive whose job it is to match you with the perfect insurer, every time.
Policies you can rely on, all with the backing of the wider PIB Group.
For advice tailored to your unique needs, don’t hesitate to get in touch with our Trade Credit Insurance specialists today. Whether you know what type of insurance you need, or you need a little help, we’re always here to talk you through the process.