Credit insurance; everything you need to know about covering the risk of unpaid invoices
If there is one thing entrepreneurs want, it is growth. Customers who pay slowly or not at all, hinder that growth. That risk can be covered with credit insurance. If a company does not pay, the insurer will cover the damage. But what is credit insurance exactly?
The three parts of credit insurance.
In essence, credit insurance is nothing more than covering the risk of unpaid invoices. Roughly speaking a credit insurance consists of three parts:
- Gathering information about your prospect or customer.
- Determining the creditworthiness; can the company you want to do business with pay its bills?
- Determine the so-called credit limit; up to what amount can you do business responsibly?
These are the four main reasons for choosing credit insurance
Every organisation has its own motivations and considerations. According to Hans-Peter Vloemans, Managing Director at CreditDevice International, these are the four main reasons why entrepreneurs choose credit insurance:
- Removing worry and providing comfort. Some companies have debtors who are too big to fail. “An organisation cannot bear the bankruptcy of such a debtor,” says Vloemans. Besides being very useful, credit insurance can also be comfortable. “For example, it gives certainty in business management and operational results.”
- Safer growth. Because the debtor risk is covered, companies can grow on a sound basis. Moreover, if you know that a prospect is less creditworthy, you know this in advance and can, for example, make other payment arrangements or apply higher margins.
- More work capital. “Because you know that you are doing business with creditworthy debtors, it is realistic to assume that they will pay more quickly,” says Vloemans. “Especially in combination with Credit Management Software, credit insurance has a very positive influence on the DSO, the Days Sales Outstanding.”
- Borrow more and more cheaply. A company with credit insurance gives a lender more security, Vloemans knows. “As a result, an entrepreneur can often loan more from the bank on more favourable terms.”
For whom is credit insurance useful?
Credit insurance is for companies that do business with other companies: B2B. Private individuals and governments are usually excluded from coverage. Exclusion may also apply to countries with geopolitical risks, so called sanction countries.
What forms of credit insurance are there?
- The most common form is the turnover policy. “With this all debtors are insured,” explains Vloemans. “There are different variants, depending on the type of business and the needs.”
- It is also possible to insure one transaction or one debtor (or a few debtors). Vloemans: “It is even possible to insure debtors from a single country. But: compared to a turnover policy, these insurances are relatively expensive.
- An excess of loss (XOL) credit insurance policy is the perfect solution. “As an entrepreneur, you remain fully autonomous in credit management. But that also means that you are responsible up to a certain level.” You determine the level of that responsibility. The leading question is: what loss can you reasonably bear?
What does credit insurance cost?
There is no simple answer to this question, because it depends very much on the company and its needs. Broadly speaking, the costs for a turnover policy amount to between 0.075 per cent and 0.35 per cent of the turnover. Insurers set conditions, which you as entrepreneur should not underestimate. More about this in the blog Credit insurance is convenient, but this link is the key to success.
What is the role of a broker?
When taking out credit insurance, a so-called broker is often involved. With their knowledge of the market they help to choose the best form of credit insurance. The broker is an impartial intermediary paid by the insurance company.
Do you want to know more about credit insurance? Contact us now, without any obligation.