How to protect your business against payment default ? (What is a Trade Credit Insurance)

Any business that offers credit terms on the goods and services they sell is vulnerable to bad debt. Regardless of your business type, size, industry, and how carefully you manage your finances, you’re unfortunately always at risk of some of your customers defaulting on their payments. A trade credit insurance policy will protect your business from a loss that you may never recover from.

It’s estimated that for most small businesses, the debtor’s ledger usually accounts for around 40% of its total assets. With accounts receivable forming such a significant portion of working capital, trade credit insurance is a sensible option for businesses trading both domestically and internationally to protect themselves against non-payment and guarantee their cash flow.

While most small businesses can manage – and often proactively budget for – small payment defaults on a semi-regular basis, a large and unexpected default from a high-value debtor can have catastrophic consequences. Some businesses never recover from a significant payment default; for others, it takes them years to restabilise their balance sheet.

Your debtor’s ledger is likely to be one of your business’s largest assets – it makes sense to protect it with a robust trade credit insurance policy.

What is trade credit insurance?

Trade credit insurance (also called debtor insurance) protects your business’s cash flow and liquidity by covering your losses in the event of non-payment by a debtor. Whether your debtor has become insolvent or is simply refusing to pay their bill, trade credit insurance gives you peace of mind that your profits are protected and puts cash back in your hands.

Who needs trade credit insurance?

Any business that provides its customers with credit terms should seriously consider trade credit insurance. It can be used by businesses that trade with domestic and international customers to protect their liquidity and cash flow.

No business is immune from bad debt – trade credit insurance is an effective risk management tool that complements your existing credit control measures and provides you with a safety net whenever payment defaults occur.

What are the main benefits of trade credit insurance?

• Your profits are protected
• The real cost of a bad debt is far more than simply the loss of money owed to your business. A substantial unpaid debt can have a devastating impact on your cash flow, liquidity and overall profitability – it could even send you into bankruptcy. With trade credit insurance, you have peace of mind that you’re protected against customers’ failure to pay so you can focus on running your business rather than worrying about your accounts receivable.
• Stronger credit and risk management
• Smart small businesses insure other major assets such as buildings and equipment – you should protect your debtor’s ledger in the same way. Whether your customers are local or international, it’s impossible to fully know their financial situation. Trade credit insurance adds another layer to your credit management approach, giving your business (and your bank) confidence that you’re protected.
• Confidence to expand
• Trade credit insurance allows you to expand your business with certainty, knowing that the cost of possible payment default is covered. You may even choose to offer more favourable credit terms than your competitors in order to acquire or retain certain customers, safe in the knowledge that their debts are protected if things go wrong.
• Boost your borrowing power
• Most banks treat trade credit insurance as collateral security when providing financing for domestic or international sales, giving you more borrowing power to invest for growth.

At Cashflow Finance, we support our clients to trade with confidence, knowing their business is protected against payment defaults. That’s why we include trade credit insurance with all our invoice finance facilities.

When you’re approved for a Cashflow Finance debtor finance facility, your business is automatically protected against non-payment by your account customers.

The team at Cashflow Finance has more than 30 years of experience working with small businesses across Australia to protect their profits, liquidity and cash flow with tailored invoice finance solutions that allow them to grow while protecting them against payment default.

Book a free 30-minute consultation today to speak with us about how we can provide you with peace of mind and the freedom to grow your business with innovative invoice finance and trade credit insurance solutions tailored to you.