With a challenging economic climate and insolvencies on the rise, have you considered the risk of debtors defaulting to your business?

We’ve all heard the 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. Most businesses have growth ambitions but, unfortunately, with growth comes additional risks which can be challenging to minimise. Statistics show that insolvencies are on the rise as the economic climate and high energy prices put pressure on company finances; the second quarter of 2022 saw the highest level of quarterly insolvencies since 2009. Further, in August 2022 over one in ten businesses in the UK reported there was a moderate-to-severe risk of their business being declared insolvent.

Naturally, the more you get to know your customers the more likely you are to offer credit terms. Doing so helps build trust and can lead to long-term profitable business relationships. However, the economic outlook is changing rapidly, and the risk of non-payment has risen significantly. Your customers’ business could fail through a variety of circumstances, often for reasons beyond their control, leaving you as an unsecured creditor with a loss of income affecting your cashflow and turnover. Recurring late payments also present a problem to businesses as they are unable to accurately predict their own cashflow. Late invoice payment has become a prominent problem for UK businesses, with 58% of business invoices affected.

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 customer’s risk profile? You also need to consider your ability to pay your own creditors if you ran into cashflow issues because of late payment or non-payment from your 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.

Many businesses will obtain credit reports (from Creditsafe and others) on customers which, when coupled with payment history, will act as a guide for setting credit limits and future trade on credit terms. But most of the information in these reports is historic and cannot necessarily be taken as a guide for the future. The only secure way to extend credit to your customers is to insure credit limits against non-payment and insolvency.

It is commonplace for companies to insure themselves against the many unforeseen risks in their business, but they often overlook, or are unaware of, the need to protect against financial loss through a customer’s insolvency or non-payment. Like most insurance cover, it comes down to peace of mind.

What effect is the current economic climate having?

The pandemic, Brexit, and the war in Ukraine have had a negative impact on credit risk and 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.

Supply chains across the globe have been impacted by rising costs and disruption and it will be some time before they return to normal. In the meantime, rising costs have placed pressure on the need for higher credit limits from customers which places suppliers at an even greater risk than before.

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 non-payment, thus minimising the detrimental impact this can have on cashflow. Credit insurance policyholders also have access to expert advice to assist with setting credit limits, and the insurer will also monitor the ongoing risk profile of a customer you have extended credit to.

To find out more about benefits of credit insurance, read our case study.

Our team of experts can offer advice on how to 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.