Unfortunately, we’re seeing some challenging situations in many industries across the UK at the moment. The UK is officially in recession, and the number of businesses forced into insolvency is on the rise…
Of course, economic uncertainty can have all sorts of implications for business owners, but one of the least spoken about is the increased risk of non-payments to B2B firms that offer credit terms.
For many B2B businesses that offer credit terms to their customers, non-payments on goods and services can have severe consequences on the firm’s financial health. So, with an increased risk of non-payments across many industries, firms should be looking to take proactive measures to mitigate against this threat.
This is where trade credit insurance comes in! Let’s explore the crucial role that trade credit insurance can play in protecting business revenue, and address some of the common concerns that business owners raise when debating whether to take out coverage.
What is Trade Credit Insurance and Why is it Important?
Trade credit insurance, also known as credit insurance or accounts receivable insurance, is a risk management tool that protects businesses against the risk of non-payment by their customers.
When a business sells goods or services to another business on credit terms (i.e., payment is expected at a later date), there’s always a risk that the customer may default on payment due to insolvency, bankruptcy, or other financial difficulties. Trade credit insurance provides coverage against this risk, compensating the insured business for losses incurred due to non-payment by customers.
In the UK, even with the current economic challenges, the take-up of trade credit insurance still remains low. Many firms either don’t think they need it or are put off by some of the myths around the industry.
Let’s explore some common reasons given for why businesses choose not to take out trade credit insurance and examine the legitimacy of those claims.
6 Reasons Why Firms Say They Don’t Have Trade Credit Insurance
“I trust my customers and so don’t need trade credit insurance.”
If history has taught us anything, it’s that the economy and the businesses within it always experience unforeseen events. Firms of all shapes and sizes fail, all the time. In fact, in 2023 England & Wales hit a 30-year high for insolvencies, with over 25,000 firms going under.
Firms that offer credit terms and don’t have trade credit insurance are essentially gambling the financial security of their business on the financial security of their clients’ businesses.
“We’ve never had any issues in the past.”
This is a similar point to the last one. Businesses that have never had any issues with credit payments in the past could reasonably argue that they would’ve lost money if they’d had trade insurance cover. The trouble is, if they’re in an industry with particularly high-value sales, it can take only 1 or 2 poorly timed non-payments to cause a real problem.
‘Better to be safe than sorry’ is a grossly overused phrase, but it does in some ways define the reasoning for all types of insurance, and it’s no different here. Trade credit insurance protects your business against the risk of non-payment in the first place, giving your business peace of mind and the confidence to offer credit terms as an attractive payment option for clients.
“Trade credit insurance costs more than it’s worth.”
There will be business owners out there who know the protection that trade credit insurance could provide them but refuse to look into it due to the belief that it is too expensive. The fact is that it’s actually a pretty affordable insurance policy for the majority of businesses. It’s also a competitive market these days, with insurance providers offering flexible payment terms themselves in order to get ahead.
Businesses that offer credit terms on their goods and services should at least get some accurate quotes to determine whether the investment is worth it for them. Another way to look at it might be to consider the opportunity cost of not having the coverage when/if one or more clients fail to make a payment.
“You must insure the whole business.”
Some businesses sell some products/services with credit terms and others without. Naturally, these business owners won’t want to take out coverage on all of their revenue as they’ll see some of the premium as a waste of money. Fortunately, as with most business insurance types, trade credit insurance policies can be customised and tailored. If you don’t need to insure all of your revenue, then you can opt for structures tailored to specific trades within your business.
“It’s time-consuming and complicated.”
Some businesses simply put off getting trade credit insurance because they think that it will take ages to get everything properly sorted out. It’s true that there is a bit of admin required to get the right policy set up, but it is greatly influenced by the broker that you decide to go with. A good broker will be able to guide you through the whole process in a fast, efficient way and advise you on the right policy to suit your specific business. Once the policy is live, there is unlikely to be much admin required.
“It negatively impacts new business and customer relationships.”
Finally, some argue that having trade credit insurance can negatively impact sales. There are a few concerns that are regularly touted, such as:
- Credit Limits: Part of a firm’s trade credit insurance policy could define credit limits on individual buyers that score poorly in terms of creditworthiness and other risk factors. This could mean that the business would have to decide whether to limit the amount of credit offered to those buyers or accept the risk of non-payment beyond the insured limit.
- Damages Trust: Some businesses worry that customers will perceive their trade credit insurance as a lack of confidence in them, that they are being perceived as untrustworthy. These businesses worry that this could damage customer relationships.
While there may be merit in those points in some situations, more often than not trade credit insurance actually allows firms to increase sales, rather than hinder them.
Businesses that have proper coverage for their revenue can operate with more confidence regarding offering credit terms. Having confidence in your revenue is not just about being able to offer credit; it gives firms the foundation needed to think strategically about their business and where they want to take it.
Having trade credit insurance is not something that most reasonable clients will have any problem with; in fact, you could argue that it’s more of a sign that your business is taking the necessary steps to secure itself, which should be encouraging for someone weighing up a potential business relationship.
Conclusion:
To conclude, in today’s economic climate, there is a level of uncertainty hovering over many industries in the UK that make the risks of non-payments on credit due to insolvencies and financial issues higher than perhaps they were a few years ago.
Trade credit insurance is a great option to mitigate your business away from any non-payment risks, and as discussed in this article, the benefits of the policy outweigh the negatives for the vast majority of credit offering B2B firms. With the right cover, businesses can push on with their growth, safe in the knowledge that their revenue is protected.
