Mention trade credit insurance and you could be forgiven for thinking it isn’t particularly exciting. The insurance industry has a reputation as the boring uncle of the financial services sector. But trade credit insurance – which protects a business if a business customer fails to pay – is anything but boring, says Sarah Murrow, chief executive officer of Allianz Trade UK and Ireland.
“Companies are taking a more strategic approach to insurance,” says Murrow. “It’s no longer a simple trade-off between premiums and claims. It’s about a return on investment and trade credit insurance not only offers companies protection but the opportunity to grow their business. It can be hugely beneficial to companies of all sizes, across different sectors and through all types of market cycles.”
Navigating choppy waters
There’s no denying that the past few years have been tough on businesses. Record high inflation, a near two-year cycle of interest-rate hikes and the threat of recession have put a real squeeze on business profitability. Throw in Brexit, the fallout from Covid-19 and current geopolitical tensions and it’s clear that businesses are navigating some very choppy waters.
According to Allianz Trade’s Global Insolvency Report, global insolvencies are set to rise by 21% this year and a further 4% in 2024, with the UK alone forecast to experience a 16% jump. And it would appear no industry is immune, with the collapse of household names like Wilko and Buckingham Group showing that even the biggest players can take a hit when things go wrong. Against this backdrop, financial protection against a major customer collapse is vital.
“Soaring costs have seen some businesses forced to close their doors and the outlook remains challenging,” says Murrow. “The full impact of interest-rate rises has yet to fully trickle down to the economy. If a business is exposed to a small number of key customers or operates on razor-thin margins, one unpaid invoice can have a huge impact on the balance sheet.”
She adds: “There is a greater chance that a business will experience a loss within their accounts receivable than any other asset and often, it is the only major asset not insured.”
But while protection against unpaid invoices may seem the obvious choice in trade credit insurance, other financial benefits are fast turning it into a must-have investment.
Crucially, trade credit insurance means businesses will not need tight credit control while assessing a company’s creditworthiness, saving valuable time and enabling businesses to ramp up their turnover faster. For companies keen to target new markets, especially export markets, trade credit insurance can provide the confidence to offer credit terms they might otherwise hesitate over.
Despite a difficult climate, 49% of organisations surveyed by Allianz Trade want to diversify and target new countries. The UK is particularly optimistic for exports, with 83% of companies expecting growth in export turnover in 2023. Yet 40% of exporters fear a rise in non-payment risk in 2023.
Exporters are facing longer wait times to get paid, putting cash flow and working capital under strain. Half of the businesses surveyed by Allianz Trade expect the length of their export payment terms to increase.
“Post-Brexit, the UK government has been keen to open new paths and break down barriers to overseas trade and there are plenty of good opportunities in the export markets,” says Murrow. “The key is to make sure you know who you’re dealing with. The economic environment could cause major issues for highly leveraged companies, potentially putting loan agreements under real pressure.”
Allianz Trade, which insures more than $1tn business transactions each year, has a proprietary risk database that monitors more than 85 million companies, grading them on buyer risk, sector risk and country risk. It also has more than 70,000 customers reporting on slow payments globally. Access to such a wealth of data allows Allianz Trade to identify trends and patterns of slow or defaulting payments on a global scale.
“An invitation to tender can be a big deal for a business, but is it a contract worth winning? How do you know if they’re approaching you because they love your product or service or because their other suppliers are refusing to play ball due to unpaid invoices?” says Murrow.
When an insurer is happy to provide cover, you can be much more confident that the business has a sound record of payment, which means keener prices can be offered, helping businesses to grow faster.
Murrow continues: “An insurer doesn’t just tell a business how strong a potential customer is; it can say to what level it is safe to trade with. The ability to rapidly increase business with creditworthy customers offers businesses a strategic advantage.”
It’s an approach that flies firmly in the face of those businesses which have taken a pro forma stance to customer payments, asking for cash upfront because of the uncertainties of the past few years. While in theory that might seem a good idea to protect the business, it is an approach that could choke growth and drive away business.
Importantly, trade credit insurance can also improve access to better borrowing, which isn’t always easy for small- and medium-sized businesses.
“It’s a tough time for everyone. Banks are increasing their lending requirements which can have a negative impact on business growth, particularly for small companies. A business that uses trade credit insurance can be more stable and banks know this,” explains Murrow. “It also means that businesses that keep a bad debt reserve can potentially reduce its size.”
And then, of course, there’s the cost of managing credit in-house. Many staff can be drawn into the work, even if it isn’t their full-time job and diverts them from their role.
Outsourcing credit management and using an insurer like Allianz Trade can provide customers with credit limit approvals, often instantaneously, and the reassurance that their customers’ creditworthiness is continuously monitored. It’s often much cheaper than hiring large numbers of credit staff and buying credit reports from providers. It also takes away the added cost of collection if a customer fails to pay, which can be especially tricky when the customers are overseas, where the lay of the land can be complex and unfamiliar.
Boring uncle? Far from. As businesses look to grow, there is little doubt that investing in trade credit insurance could be just the exciting boost they need.
Learn more about how Trade Credit Insurance from Allianz Trade could be the shield that protects your business and a growth enabler