If one of your debtors goes under and you aren’t insured against non-payment, you could find yourself closing your doors behind them.
Domestic credit insurance provides cover for your local sales for non-payment and bad debt losses arising from insolvency or failure to pay. It mitigates the risk of non-payment, protecting your balance sheet and securing your working capital and cash flow. It also enables you to become more competitive: you can offer your customers open account credit terms while protecting yourself against credit risk, so you can increase your market penetration and even develop new markets for your products or services. Credit insurance increases borrowing capacity because it enhances your accounts receivable and enables you to secure better financing terms from your bank. In addition to protecting you against bad debt, credit insurance protects you from having to engage in debt collection, making it easier for you to retain clients.
“When you buy credit insurance, you also have access to expert assessment of credit risks which helps you identify good and bad credit prospects and gives you access to debtor information,” says Ivor Jones, MD of commercial credit information company KreditInform.
How it works.
You apply to a credit insurance provider to protect you against non-payment by a debtor. The insurer will investigate the creditworthiness of your debtors, determine your premiums in accordance with industry bad debt history, and produce a risk profile of the debtors you choose to cover. Should you not be paid by the buyer once you have concluded a transaction, the insurer will assist you in collecting the outstanding debt. If the buyer defaults and does not pay, you are covered by the policy and will receive the agreed percentage of the outstanding monies.
Types of cover.
Jones says the best option for businesses is single debtor cover, which is an insurance policy on a specific transaction with a specific debtor for a specific period. There are two single debtor options available; one covers protracted failure to pay and the other covers debtor liquidation. “You can pick those buyers who pose the greatest risk to your business and pay only for that cover. This is the most affordable option,” says Jones.
Next best is catastrophe insurance.
“Here a business identifies its top exposure debtors, whose liquidation would have severe repercussions.” Another option is to take out cover for the 20% of your book that brings in 80% of your revenue. Full book cover comes at a premium based on the whole debtors’ book. It generally costs between 0,25% to 0,35% of the amount declared. “It’s the most expensive type of cover, and usually the least effective,” says Jones. Some of the top credit insurance providers in the country include KreditInform, Credit Guarantee, Coface and Lombard Insurance Company.