The Benefits of Trade Credit Insurance

Imagine if three of your biggest customers start paying you late. How would it affect your cash flow and business stability?

Customer insolvency is a growing problem, and non-payment risk can be a substantial threat to any business. If your clients can’t pay you, or you have to chase invoices, the impact on your business could be catastrophic.

Let’s take a look at a theoretical case study and the disastrous domino effect of non-payment, and how Trade Credit Insurance can protect you from such a scenario:

The case of ABC Manufacturing and XYZ Corp

ABC Manufacturing Ltd, a small UK-based manufacturer, supplies custom-made parts to various clients, including one large contract that accounts for 30% of its revenue. The business relies heavily on timely payments to cover operational costs, salaries and reinvestment in production. One of ABC’s largest clients, XYZ Corp, suddenly stops paying invoices, citing temporary financial setbacks. Initially, ABC Manufacturing assumes the issue is temporary. However, as weeks turn into months, the unpaid invoices accumulate to a significant amount, impacting ABC’s cash flow and operational stability.

Without payment from XYZ Corp, ABC faces a cash flow shortage, making it difficult to pay suppliers on time and keep production running smoothly. The mounting debt also puts pressure on ABC’s ability to pay staff salaries, meet loan obligations and maintain other essential expenses. As ABC’s cash reserves dwindle, the company begins losing flexibility to take on new projects, slowing growth.

To stay afloat, ABC Manufacturing seeks emergency financing, incurring high-interest debt to cover immediate expenses, ultimately reducing production, laying off staff, slowing their planned growth and losing significant time and resources.

As we can see, the knock-on effect of a client not paying you on time, or at all, is pretty brutal, but all is not lost…

Step in, Trade Credit Insurance!

The importance of Trade Credit Insurance for businesses relying on clients cannot be underestimated. With Trade Credit Insurance, ABC could have hugely mitigated the impact on their cash flow, allowing them to recover quickly and continue operating without significant disruption.

How does Trade Credit Insurance work?

Trade Credit Insurance safeguards against non-payment by covering a percentage of the receivable amount in the event of customer insolvency or prolonged payment delays. This way, businesses can continue to operate and invest confidently, knowing they’re protected against potential losses.

One of the key advantages of Trade Credit Insurance is its role in facilitating growth. With the added security of insurance, companies are better positioned to expand their reach, confidently offering credit terms to new customers or exploring new markets. For UK companies looking to trade internationally, Trade Credit Insurance can be especially valuable, as it helps offset the additional risk associated with unfamiliar foreign buyers.

This type of insurance also protects against economic volatility. With today’s economic uncertainties, including inflationary pressures and shifting market conditions, the risk of customer insolvency has increased. Trade Credit Insurance provides a critical layer of protection during economic downturns, helping businesses remain resilient even when the market falters. By transferring risk to the insurer, companies are better equipped to navigate periods of economic volatility without compromising financial health.

Consequently, it offers peace of mind for business owners. Managing financial risk is a major concern for any business owner, and the peace of mind provided by Trade Credit Insurance is invaluable. With the assurance that receivables are protected, business owners and financial teams can focus on core activities like driving sales, innovation and expansion without being overly concerned about potential cash flow disruptions from unpaid invoices.

Finally, Trade Credit Insurance supports quick recovery from financial losses. When a customer defaults, the financial loss can have a ripple effect on the business, affecting suppliers, payroll and other obligations. Trade Credit Insurance accelerates the recovery process by providing compensation for unpaid receivables, often within a few weeks of the claim. This swift response enables businesses to recover quickly, minimising the impact on cash flow and operations.

A necessity for today’s business leaders

For businesses navigating today’s unpredictable economy, Trade Credit Insurance has become an invaluable tool for managing and reducing financial risk. By protecting cash flow, facilitating growth and enhancing credit management, Trade Credit Insurance provides businesses with the stability they need to succeed. As more UK companies adopt this safeguard, they’re better positioned to thrive, even in the most challenging conditions.

Other blogs which may be of interest:

The importance of trade credit insurance for the construction-industry

The importance of trade credit insurance for the transportation industry

Could Trace Credit Insurance help YOU? Get in touch with the experts at Ascend today on 01245 449060 or email info@ascendbroking.co.uk.