Trade is an integral part in the concept of business, which involves the activity of potential exchange between two parties, i.e., a buyer and a seller. Most businesses trade on credit terms with their customers, letting them purchase as they need and pay later. In an intricate market like today’s, a buyer may purchase goods on credit basis from his supplier in order to keep the business running. However, extending credit to your customers, while a common and strategic business practice, also comes with its own set of risks. What if the buyer becomes insolvent and is unable to pay back? What if the buyer wilfully defaults on his payments? What if the buyer’s own customers are unable to pay him back due to any reason? In order to mitigate such risks, it is crucial to protect your business accordingly. One of the biggest problems with a line of credit is that it can affect your business’s cash flow. And a healthy cash flow is more than just a sign of a healthy business, it can be a make-or-break factor. A stable cash flow lets you pay staff, buy materials, and meet your debt obligations.
Thereby, to reduce such uncertainties from your business, Trade Credit Insurance (TCI) emerged in the market.
We all know too well that business insolvency often has a domino effect.
For every business that collapses, an average of ten more suppliers will feel the financial shock of a bad debt on their cashflow which leaves them unable to pay creditors and staff. In this way, the failure of one business can start a chain reaction. While it’s comforting to think: “Our customers are solid”, the reality is that no business is immune from trade risk. Your cashflow may be more exposed than you realize because of another company in the supply chain. You may know your own customers but you won’t necessarily know theirs.
Further, businesses involved in international trade have to deal not just with local risks but also other business development risks such as willful/protracted default, transportation issues, credit/currency/political risks and a lot more. Many a times, it is complicated to keep up with the risks and attempting to stay clear from any such problem. But, while engaging in trade, any company which is not safeguarded by some third party to assist in solving such problems, can face fiscal restraints in the long run.
The coronavirus pandemic was a big blow to many businesses, so big that it drew several businesses towards insolvency. It has forced regional and national economies to close for weeks and months at a time, causing hardships, sometimes of existential gravity for many populations.
Before India’s peak apocalyptic COVID-19 crisis, the country saw a decrease in prompt invoice payments of 23% by the end of 2019. However, this number went back to over 40% when India became an outbreak epicentre globally.
More than 16,000 companies were struck off from official records during the period from April 2020 to June 2021
285 firms faced bankruptcy proceedings in first two quarters of FY 2022
More than 10% of late invoice payments are considered bad debt or never paid at all.
The issue of late payments is even more prominent in the SME segment. Statistically, 1 out of 10 SMEs receives late payments. Up to 30% of small and medium-sized businesses expect to face the negative impact of their late payments that may affect the company’s supplier, staff, and investments.
Trade Credit Insurance is essentially a method for protecting a business against its commercial customer’s inability to pay for products or services, whether because of willful/protracted default, bankruptcy, insolvency or political upheaval. It is also referred to as account receivable insurance, debtor insurance or export credit insurance.
Trade Credit Insurance reimburses companies when their liable customers default on their payments either willfully or due to insolvency or some sort of political instability. The insurer prices the policy based on the size of the customers, their creditworthiness and the risk involved in the industry, thus covering all factors which are internal to the supplier’s business. TCI mitigates or reduces the severity of the risk by compensating the policy holders for the unpaid debts up to the applicable limits.
One of the core advantages of TCI is that the insured companies can extend credit to new or existing customers more confidently, knowing that they will be paid back regardless of their customer’s financial situation. In industries where most of the competitors possess a TCI, building and retaining a loss mitigation strategy becomes a necessity just for the sake of staying in competition. With reduced risk in the business, TCI can prove to be a useful tool to increase the credit lending capacities and improve credit strategies significantly.
In Trade Credit Insurance, the cost of the policy reflects the projected risk posed by the insured to the insurer. Typically, coverage costs less than one percent of insured sales volume, according to Meridian Finance Group. Based on the financial strength of the client’s covered debtors or trade partners, insurance companies provide each with a credit limit. When a buyer fails to pay his dues to the insured, the insurance covers the decided ceiling of reimbursements. Though some carriers include nonpayment due to trade embargoes or other government-related events in their TCI coverage, other insurers offer a separate product known as Political Risk Insurance. Such protection can be especially important for firms that operate in traditionally unstable regions, including multinational corporations and large hospitality chains.
Better Banking Terms
Banks are more likely to lend to businesses that have TCI, as well as provide larger lines or reduced financing fees for covered receivables. Borrowing costs are also often lower. The opportunities and cost savings provided by trade credit insurance can offset the cost of the policy.
Improved Cash Flow
Your cash flow is a powerful yet vulnerable resource and you know the importance of protecting yourself against unpaid invoices and insolvencies. These can impact your cash flow and pose a threat to your company. TCI helps companies avoid risks and replaces cash flow should the worst happen and a customer insolvency or non-payment occur.
For example, a manufacturer with a margin of 4% that experiences a non-payment of INR 500,000 would need 25 equivalent sales to make up for a single instance of non-payment. TCI can help to mitigate this loss.
Save Money On Expenses
You can cut spending on credit information as that’s covered, and you won’t need to waste resources on chasing collections. Your company can also deduct the cost of the policy as a business expense.
Free Up Bad Debt Reserves
Capital set aside as reserves can be freed and converted to earnings.
TCI lets you offer more competitive credit lines to existing customers as well as identify new market opportunities, making it easier to grow your business. Multiplying this increase by several customers could easily offset the cost of a policy.
By entrusting the protection of your debtor book to TCI you can focus your time on business development.
You may be able to negotiate favorable terms with your suppliers as TCI reduces the impact of a bad debt on them and potentially the whole supply chain.
Peace Of Mind
TCI is there to help you prevent and mitigate your trading risks, so you can develop your business with the knowledge that your accounts are protected and take the right decisions for your business.
Trade Credit Insurance can protect your business against losses, covering the shortfall when customers don’t pay. This protects your cashflow. However, we at Raghnall, can do more than that. We can also provide assistance with due diligence and credit checks to ensure you only extend a line of credit to trustworthy customers. We can assist with debt collection services if your customers don’t pay as well as provide market assessments that helps you understand the risks and opportunities in your sector so you can make smarter decisions.
To know more about how Raghnall can help you get the right Trade Credit Insurance for your business, contact us today at firstname.lastname@example.org
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