Credit insurance: Is it necessary?

There is a classic challenge felt by many businesses.  Sales teams want to push the risk envelope to win more sales, sometimes beyond the comfort zone of credit control.  Credit control teams are responsible for bringing the cash in, so it’s understandable they will caution unchecked selling. But there’s a balance to strike: after all, nothing is really sold until it’s paid for.

Once sales teams get past calling credit control the risk department, or (worse) order prevention, and work collaboratively to ensure every sale is within the bounds of reasonable credit risk, the business can grow to its full potential.

Business growth should always be a priority, so credit policies need to support sales to win deals and support a reasonable risk of late or non-payment.  Risk is an inevitable part of doing business.

However, credit risk, in the extreme, is often insured against to prevent terminal cash flow shocks from bad debt.  As is the way with insurance, the long-term costs to an insured business tend to outweigh the claims (or there simply wouldn’t be a business case for credit insurance companies to operate).  Credit insurance is there for the black swan events, the extremes that cannot be weathered as part of day-to-day risk management.

Types of trade credit insurance

Trade credit insurers generally offer cover for two main classes of credit risk businesses are exposed to through their trade finance agreements with customers. The insurance market offers a variety of types of insurance within these primary classifications, with policy criteria and premiums tailored to the difference in needs across SMEs to larger enterprises.

• • Commercial risk credit insurance – this insures against circumstances where your customers are unable to pay their outstanding invoices because of commercial reasons relating to that business, such as insolvency or protracted default.
  • Political risk credit insurance – this insures against circumstances where non-payment is due to events outside the policyholder or customer’s control. These scenarios can include political events, such as wars, invasions, and revolutions;  economic difficulties, such as national shortages of currency; or natural disasters, such as flooding, earthquakes, and extreme weather events.

Credit insurance and setting credit terms for new customers

Credit managers have to balance credit risk with the benefit of longer credit terms when making credit decisions for any new customer. Risk mitigation is key to setting credit limits, so having credit insurance in place to cover extreme risks is helpful in removing outlier events, and unknown risks of new markets, from risk calculations. This frees credit managers to set credit terms closely aligned with each new customer’s credit rating.

So, why are we even asking the question of whether credit insurance is necessary?  Are there really businesses so cavalier and risk-happy that they would operate without this safety net? Surely this insurance product is just another aspect of business insurance that needs to be factored into the cost of doing business.

Well, according to Atradius, only 53% of Western European businesses had credit insurance in 2021.  This was an increase from just 18% in 2020 – perhaps as we all learned a little from the impact of the coronavirus pandemic and supply chain crisis on cash flow.  So, what are the alternatives to a credit insurance policy?

Aside from relying on lucking out and never having too significant a deal go unpaid, there are a couple of ways businesses can look to offset the financial risks normally taken on by a credit insurance provider.

In some cases, Lien laws may be sufficient to reduce the risk exposure from non-payment.  These laws allow businesses to take partial ownership of goods in some cases where payment is outstanding.  For instance, builders working on a house, or mechanics working on a vehicle, may be entitled to a percentage deductible from the total eventual sale value if their agreed fee is unpaid.

In most cases, credit insurance work is done to protect against the risk of customers being unable, rather than unwilling, to pay.  So, there is little scope for legal action to recoup the outstanding debt.  Credit insurance is a last line of defence. – one that businesses hope will never be called upon.

So, is there an alternative that doesn’t rely on luck or ownership and resale of a customers’ goods to recoup debt?  Well, yes there is.  Let us introduce you to Corcentric Managed Accounts Receivable (Managed AR) and explain how it provides a non-resource agreement to eradicate bad debt and remove your need for credit insurance.

Managed accounts receivable

Corcentric provides businesses with accounts receivable as a managed service (Managed AR) fully underwritten with a non-recourse guarantee. Corcentric pays every invoice, in full, on the agreed number of days after issue and then owns the responsibility of taking payment from the end customer, underwriting the associated risk of late payment and bad debt.

Managed AR removes the need for bad debt reserves on the balance sheet. Whether the debtor is delayed in paying Corcentric, or never pays, there is no comeback on the seller. Bad debt simply ceases to be a problem for the seller; it is the sole responsibility of Corcentric.

Managed AR appeals to businesses who may have otherwise considered invoice factoring or other types of invoice finance. One of the key differences in Corcentric’s program is the approach to debt collection. This is done as an extension of the seller’s business, preserving the sensitivity and respect for ongoing customer relationships, rather than solely focused on bringing the cash in.

Accounts receivable as a managed service presents greater freedom when scaling up or down: Businesses no longer need to hire, train, and retain extra staff to support sales growth.

Find out more about how Corcentric Managed AR removes the need for credit insurance, as well as other common overheads and management distractions of the accounts receivable process, in this white paper, or arrange a call with one of our experts today.