Why purchase credit insurance?
Financial backing to credit opinions
Status information is more widely available than ever before, but status reports cannot in themselves indicate whether it is safe to trade on credit terms, particularly as company trading positions change daily. Credit insurance provides financial backing to a credit opinion.
Your company’s unprotected asset
Your sales ledger represents a large part of your asset base. For a manufacturer it is usually at least 40% of current assets; in service industries it may be as high as 90%. Even in relatively stable trading conditions this is far too much to leave at risk.
Replacement of working capital
Bad debt has a particularly detrimental effect on company profitability. Let’s assume a £10 million turnover company with a profit margin of 10% sustains a bad debt of £50,000. Additional turnover of £500,000 will have to be generated to cover the loss. Companies may create a bad debt provision or specific reserve but this will seldom cover the major exposures and is not always an efficient use of working capital.
Trading in unfamiliar markets
Cross-border trade presents a wider range of risks for the seller. Published financial information may be less readily available, added to which are the complications of language and currency fluctuation. Even where good credit management and trading relationships exist, they may be drastically affected by foreign government action. Letters of credit may add security but may reduce flexibility for the seller and tie up your customer’s working capital. With credit insurance, letter of credit terms may not be necessary.