Why you need to know about ‘trade credit insurance’.

Insolvencies are now 76% higher than pre-pandemic levels – could you afford to swallow the costs of a client going bust?

Trade Credit Insurance - A-Plan Insurance

If you’re in the trade business, you’re likely to carry out most of your services, particularly with other businesses, on credit terms, as opposed to upfront payments for cash. Generally speaking, most clients pay the invoices every 30, 60 or 90 days or longer depending on what was agreed initially – but what if that client goes bust, or finds itself in a position of struggling to pay suppliers, while you’re awaiting payment? What impact would that have on your business, and your own credit?

Just take a look at Companies House insolvency statistics in their recent cost-of-living report. The report analyses the risks of going into business and looks at why so many are going bust. The data makes for shocking reading.

In March 2023, there were 2,457 insolvencies, which is 16% higher than the same period last year – and a whopping 76% higher than pre-pandemic levels!

Trade credit insurance means that you don’t have to swallow this!

In short, trade credit insurance helps protect your business from losses that may be caused by the failure of a customer to pay. Not only does trade credit insurance cover you if your client went out of business, or during periods where it’s struggling to pay due to restricted cash flow, internal challenges, or financial struggles of its own, but it can actually help navigate you away from that risk to start with. It is designed to enable your business to trade with confidence. Not only does it cover you if things go wrong, but it also helps you to consider who you would like to have on your client books

Sounds interesting? We speak to our in-house expert, Andrew Smith, about why trade insurance is so integral to the trade, no matter what size business you own.

The benefits of trade credit insurance

With high insolvency stats, and more businesses struggling post-pandemic and during the inflation crisis, it’s never been more important to consider who your clients or prospective clients are, and understand the risk involved in working with them from the outset.

So, how do we do this? Working with a specialist business broker, like A-Plan, is important to help navigate you through the process.

Through our panel of insurers, we would conduct a full market review, starting by looking at one client, or your Top 10, depending on the size of your business. While most policies look to cover four from the outset, individual cover is also available and could suit your business if you have plans for growth.

We look into the risk allocated to your clients by our insurers, giving you an idea of cost and risk before you even take out a policy (so, even if you don’t take out a policy with us, you’ll get some useful intel about your clients). The insurers will tell you whether they see your clients as financially sound, and based on that, quote, or even advise you not to work with them at all if they are a considerable risk.

This can really support smaller business in navigating the minefield of working with the right customers, particularly in the current cost-of-living, high-inflation environment.

If you do decide to go head, you can start with just one client, you can add more and more to your portfolio of clients over time. And, you don’t necessarily need to cover every business client you have, just the ones that are the bigger risks, so plenty of flexibility to suit you and your growing business.

So how is it quoted? Generally speaking, the cost of a policy is bracketed around the turnover of a client and places a limit on what would be owed for any given job. There isn’t any admin, and you wouldn’t need to provide invoices to the insurer, it just runs in the background while you get on with the day job, safe in the knowledge that you are working with the right businesses, and that your own business will not be placed at risk.

Your first contact with our trade insurance specialists can be arranged to suit you, virtually or face to face. We will set about understanding your credit terms, and finding out how your business is structured so that we can be specific on your policy. For this call you’ll need to have details of your turnover and any adverse debts over the past three years, and a list of your top 10 customers, or ‘customer’. We then review the market to ensure that your criteria from business size to budget are met, and once we have all the information to hand (usually 7 to 10 days later), we’ll arrange to talk you through it, and leave you to think about it safe in the knowledge that you fully understand it all.

To reassure you, there won’t be any credit footprint from our review, and the clients you list won’t be notified that they are being looked at in terms of risk.

Traffic light system for risk.

Red risk: Your client may be overdue in filing turnover, could be struggling, or their risk could have been updated by other policyholders having difficulties with them. In cases like this, we can request an underwriter to review the case, or request information from the business itself to satisfy insurers.

Amber: This status shows that there are weak accounts and maybe some payment issues reported. There is some cover available, but not the full amount. This can be changed with an updated set of management accounts, or an appeal from us as a broker.

Green: Good news – there are no immediate concerns. Full cover is granted.

As and when it’s needed, you will be able to log into a portal to see active limits or apply for new limits based on how well a relationship is going.

Safe in the knowledge

Sounds great, right? But here’s a question, why aren’t more businesses using this type of insurance?

The problem is that businesses don’t know it exists, or they think it would be too expensive, or believe that only ‘good’ companies will be insured, or even that premiums will rise after a single claim. The truth is that a broker can navigate you through all of this, and explain how, unless you have multiple claims in a short period of time, your premiums are likely to remain. 

Like most insurance policies, you can pay annually, but unlike your home or car cover, paying monthly over 12 months is no more expensive, making it easier on your cashflow.

If you are interested in exploring trade credit insurance as an option, or would like advice on any other business insurance, contact your local business branch who would be more than happy to support you.

Join our free trade credit insurance webinar!

A-Plan are hosting a webinar on trade credit insurance, speaking with the experts, who will be able to talk in more detail about the cover and answer your questions. If you would like to join us on Thursday 20th July at 5pm please register here. And do share with anyone you feel may benefit from our free advice.

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