What is Credit Insurance?
In simple terms, Credit Insurance is a risk management insurance policy, protecting your business against loss of earnings that result from a debtor defaulting, or becoming insolvent or bankrupt. It can be used to insure some or all of your debtor credit, a specific customer debt or even just international export debts.
Importantly, bad debt cover is not the only benefit; it can also support better decision making so that you extend the appropriate amount of credit to a potential customer, it will improve the financial stability and reputation of your business and it will help free up your financial assets so that they can be spent to support your commercial growth. Read more on credit insurance +
At The Channel Partnership, before offering Credit Insurance, we always partner with our clients to identify your areas of risk and concern within the business, giving you advice on the most suitable options as a result, even if that isn’t Credit Insurance. For example, your concern may be about the weighting of your debt with specific customers, or perhaps about specific markets that you export to, or even a mixture of the two.
Meet Bob Jones...
Bob is in manufacturing and has recently won a large contract. In January, he is given an order for £50,000 for which he needs £42,000 worth of materials from his suppliers. Bob will make a 16% profit on this job.
Bob completes the order and invoices at the end of January, which is due payment at 30 days at the end of February. Unfortunately, Bob’s customer doesn’t pay at the end of February, nor do they pay at the end of March and despite promises of payment during April, Bob receives the unfortunate news that his customer is now insolvent. Not only has Bob lost out on payment for goods he manufactured, but he has also paid his supplier for the materials. This means, that Bob will have to generate £312,500 in additional sales to get back to where he started.
Having a credit insurance policy would have:
- enabled Bob to evaluate the risk this new customer poses, deciding on the appropriate level of credit to extend, and / or whether pro forma invoicing was an option
- covered Bob for the direct losses, paying him some or all of the £50,000 due and lowering his liability.