While trade credit is a powerful commercial tool for conquering new markets and building customer loyalty, it is also a double-edged sword that can weigh on your working capital and cash flow.
As part of your cash flow management strategy, trade credit insurance can help you control this credit risk.
Want to know more?
Find out more or request a no obligation trade credit insurance quote (includes a free assessment of your current portfolio).
Efficient and well supervised cash flow management is a key driver for your business, helping you manage your daily operations such as wages and invoices and investments that will lead to future growth.
In the UK, nearly 1 in 7 SMEs fail to pay wages on time due to cash flow problems (source: Intuit Quickbooks, 2019).
UK SME’s are chasing almost £50bn in overdue invoices according to know-it, and that can lead to wages not being paid and cash flow problems.
Granting your client a trade credit has advantages but also creates an account receivable that weighs on your working capital – it is cash that is not collected on the date of invoicing and creates a cash flow gap.
In the UK, the average DSO (days of sales outstanding) is 51 days - meaning companies usually have to wait 51 days between sale and payment.
There are a large amount of risks that you can be exposed to in that time, including late payments or even non-payment. Your trade receivable may then become a bad debt, creating a temporary or permanent loss of cash with respect to your financial projections.
Such bad debt is potentially very difficult to recover, especially if your client goes bankrupt. So, you should be ready to deal with late payments and invest in efficient payment monitoring and recovery processes, if necessary, through a debt collection agency.
Even then, internal debt collection creates a significant cost to human and technological resources that SMEs can ill afford.
In any case, there are some essential best practices to manage your trade credit risk:
- Evaluating your client’s creditworthiness can help you better understand who you are trading with. Give it a try with our Credit Risk Analyser.
- Negotiate clear and appropriate payment terms.
- Setting up credit limits with your clients is another good move: the amount of credit you grant should not go above a certain threshold
- Strengthen your invoicing process and invoice payment monitoring
Should the client fail to meet payment deadlines, you may require penalties and interests. As a last resort, the client's assets may serve as a backstop guarantee.
Always monitor your cash flow so that you can adapt your trade policy accordingly. You can find out more about how to do this with our eBook: How to protect your cash flow: a guide for small and medium businesses
How does trade credit insurance work?
Strong trade credit insurance remains the most reliable way to deal with trade credit risk and avoid cash flow issues.
Your insurer will firstly help you assess the financial situation and creditworthiness of the clients you have and are considering. After this, a credit limit is specified for each customer. While you trade with your existing customers, the credit risk is covered up to the limit.
Your insurer will look at the solvency of your customers, identify potential bad payers and adjust credit limits when economic conditions change.
Unfortunately, it is impossible to guarantee that 100% of your invoices will be paid – especially when your customers are abroad. In this case, your trade credit insurer investigates and indemnifies you for the insured amount.
Commercial law is often complex and varies greatly between countries. Companies like Allianz Trade have in-depth knowledge of local situations and current legislation to effectively manage these potentially long recovery processes. Our country risk reports can help to manage these local risks and practices effectively.
Trade credit insurance will ensure that you are compensated quickly in the event of bad debt - providing peace of mind for you and your finance partners - and help you improve your DSO.
It can also help manage your operations and investments efficiently in the short and medium term, and secure your growth, while reassuring bankers and shareholders of the financial stability of your company, and making you a stronger candidate for financing.
Trade credit insurance is an essential tool for building a balanced cash flow management process. This solution allows you to protect and accelerate your commercial development while controlling the risks that trade credit poses to your cash flow. You then benefit from all the advantages of an efficient and resilient trade credit strategy.
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Trade credit insurance support scheme
The support enables us to continue providing extensive cover for our clients, and pursue our mission of securing B2B trade in the face of the unprecedented challenges to supply chains posed by Covid-19.
Options for mitigating credit risk
There are several options and tools to mitigate credit risks. You should weigh the costs and benefits of these options and investigate carefully to determine the best fit for your company.
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