We’ve all heard the old adage that a sale is not a sale until it’s paid for and of course businesses always expect to get paid for what they have sold, but unfortunately this isn’t always the case.
As a business gains more trading experience it will develop confidence with their existing customers which can lead to long term profitable business relationships. However, occasionally trade credit agreements can fail through a variety of circumstances, often for reasons beyond the customer’s control, leaving unsecured creditors with heavy losses to deal with. The greatest impact from such a loss can be the negative impact on cashflow and loss of turnover, both of which can be difficult to recover from or replace.
Almost all companies need to win new business to be sustainable, but this often comes with a request for credit terms. This presents a risk to cash flow as there is no guarantee the credit extended to customers will be paid back.
Supplying on a pro-forma basis is always the most secure route of supply, but what if pro-forma isn’t suitable? How do you assess the risk, how much credit do you grant, and how do you monitor changes in your customers risk? You also need to consider your ability to pay your own creditors if you ran into cash flow issues as a result of non-payment from customers. If you are exporting to other countries, extending credit becomes even more risky because it can be difficult to assess overseas customers financials and problematic to collect if they default.
It is commonplace for companies to insure themselves against unforeseen risks but they often overlook the ability to protect against financial loss through a customer’s insolvency or default. Like most insurance cover, it comes down to peace of mind.
What effect is the current economic climate having?
The pandemic has created a range of operational and financial issues for businesses worldwide; organisations need to look at what risks the current climate has left them exposed to.
Over the last two years, governments around the world have provided financial support to businesses to help them weather the storm. But businesses must be cautious as not everyone will be able to trade out of the difficulties created by the pandemic.
In addition to this, companies are now faced with further economic disruption triggered by the war in Ukraine, which has created significant inflationary pressures within many supply chains, the costs of which may be impossible to absorb for many businesses. All of this has led credit insurers to predict that insolvencies and payment default will increase by up to 30% worldwide during the next year or so.
Most businesses have growth ambitions but, unfortunately, with growth comes additional risk which can be challenging to minimise.
How can you reduce the risk to your business from customers’ insolvency or payment default?
One solution would be to consider a credit insurance policy which can replace the cash lost through insolvency and payment default, thus minimising the detrimental impact this can have on businesses.
Our team of experts can offer advice on how you can mitigate credit risk through insurance and focus on working with strong, creditworthy customers. We can also review existing credit insurance arrangements to check that they are appropriate for your needs.
Contact the team on 01223 324233 to have an initial conversation.