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Bad Debts - Is There An Insurance Policy To Cover Them?

Aug 6, 2019

With the UK economy affected by so many external factors, from Brexit to the trade war between the US and China, there is a great deal of economic uncertainty and a great deal of instability coming over the horizon.

With these factors causing such uncertainty for business finance, and with the lack of liquidity available to businesses, volatility in the market is entirely possible with a highly-increased risk of closures to some businesses.


Amidst all this uncertainty, is there a way to protect your business from bad debts?


Credit Insurance, which is a policy that protects your business from companies who can’t pay their invoices (whether through insolvency, protracted default or political risk), might be one option worth exploring.


How does Credit Insurance Work?


In very general terms, the insurers calculate a premium from looking at your sales turnover to provide cover on your whole debtor book.

One regularly asked question is whether clients can insure one customer who concerns them. On the whole this is counter-productive as costs for one client regularly equal - and in some cases exceed - insuring your entire client book.

To receive a quote for Credit Insurance, you will need to provide full details of your debtors to the insurers, alongside details of your credit terms and also the specific amounts owed by debtors. The credit underwriter will use this information to consider the risk presented and the credit-worthiness of your customers. Having considered this, they will not only tell you the premium they would charge but also what credit limit they would grant on your customers.


A cautionary note!


As insurers use ongoing intelligence, you may find that they amend your limit throughout the policy period, as to the credit worthiness of your customers. In some cases of financial difficulty, insurers may reduce or remove your limit altogether. This can obviously cause problems, whilst also being a good indicator that you should probably be reducing your exposure to that customer, if at all possible.


In summary, Credit Insurance can be a real benefit to a business if used and understood properly. It can also be a requirement of many lenders if you are entering into an invoice finance facility.


If you would like to know more, please don’t hesitate to get in touch.


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