How trade credit insurance secures your cashflow

How trade credit insurance secures your cashflow

In the UK, nearly 1 in 7 SMEs fail to pay wages on time due to cashflow problems (source: Intuit Quickbooks, 2019). Granting trade credit has advantages, but also creates an account receivable that weighs on your clients’ working capital – it is cash that is not collected on the date of invoicing, thereby creating a cashflow gap.

In the UK, the average DSO (Days of Sales Outstanding) sits at 51 days (source: Euler Hermes 2019), meaning companies usually must wait 51 days between the sale and the payment and expose their business to credit risks such as late payment or non-payment. Trade receivable may then become a bad debt, which is equivalent to a temporary or permanent loss of cash with respect to financial projections. Such bad debt is potentially very difficult to recover, especially if your client goes bankrupt. So, you should be geared up to deal with late payments and invest in efficient payment monitoring and recovery processes, if necessary, through a debt collection agency.

Internal debt collection involves significant costs in terms of human and technological resources, costs that an SME often can’t afford.

What’s invoice insurance?

Implementing a wise cashflow management policy

There are some essential best practices to help you manage credit risk;

• Knowing who you’re dealing with is key: make sure you’ve evaluated your client’s creditworthiness before trading with a new customer.

To go further, you can try out Euler Hermes tool: 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. In any case, you should always monitor your cashflow position and adapt your trade credit policy accordingly.

Check our Euler Hermes eBook: How Trade Credit Insurance works Download eBook

Trade Credit Insurance remains the most reliable way to deal with trade credit risk and avoid cashflow issues.

This article has been produced in conjunction with Euler Hermes Global

Other useful Trade Credit Ascend articles:

- Talking about trade credit insurance

- Ascend launch new style credit insurance

- Invoice insurance protect your invoices

- What’s invoice insurance?

Have any questions? please don’t hesitate to contact one of our team