Credit Insurance - Why?

Almost everyone would accept the need to insure other assets such as buildings, vehicles and plant, even the lives of staff critical to the success of the business. But a failed significant customer can bring the whole business down. Cash will dry up quickly when the bank or factor refuse further support as confidence is lost following such an event. 

Real Benefits

• The insured has peace of mind knowing another risk has been removed from his business.
• The cover in place provides a great comfort to the bank or factor – indeed either may well feel able to continue to treat a failed debt as good whilst the insurance claim is being processed.
• Additional security provided by the business owner in support of its borrowing is provided with added protection in the event of customer failure.
• Feed back from the insurer or factor will act as an early warning to the insured should agreed limits be adjusted downwards as a customer’s rating deteriorates.

Whole Turnover or Selective Insurance?

Whole Turnover - operates by the insured paying for cover across all sales turnover  at an agreed cost, whether there is a limit granted on all customers or not, and will incorporate cover for blue-chip customers that you may not wish to include at all.

The insurer has fixed costs to absorb so that the small buyer, perhaps below £300,000 turnover, may find the quoted cost to be quite high - like all things the more you buy the cheaper the unit price becomes. There will be an agreed annual minimum premium, based upon projected sales, and payable quarterly in advance.

An application will involve lengthy discussions about bad debt history over the past few years, the financial strength of the business and its bookkeeping and management controls and a sample of customer limit requests. Most insurers will set a discretionary limit of cover. This may be a few thousand pounds, below which you will not need to make a specific limit request, the insurer relying upon you justifying this limit through trading experience or credit reports.

Once the policy is in place, you must report upon customer default, bounced cheques and overdue debtors monthly.

Should a claim situation arise, the insurer will look back to see there has been no breakdown in this reporting procedure, otherwise it will be invalidated.

For the past 25 years the larger bank owned factors have offered non-recourse invoice finance, combining  whole turnover credit insurance with funding, and this is still available and found to be an adequate solution for many businesses. The factor decides the limit of cover and removes the need for outside reporting since it obviously manages the sales ledger itself. Cover is usually 100% of the limit agreed, but beware that limit which may restrict the expected funding, indeed it may be lower than that available from the general insurance market.

Selective cover - About 10 years ago several independent factors began to develop relationships with insurers in order to add a selective insurance product to their offering .

Effectively the factor applied for it’s own policy, an umbrella of cover if you like, and then allows its client base to buy into it as required.

Immediately different benefits were seen:

1. The application process was simplified to a form identifying the customer buyer and the limit required.

2. The desired coverage is easier to identify, perhaps the larger customer exposures within the ledger, but excluding government bodies and very secure blue chips such as Tesco and other 'undoubted' buyers.

3. Whilst the actual agreed cost of cover may be a slightly higher percentage than a Whole Turnover alternative, because cover is only being applied to the specific buyers chosen, the true cost becomes much more affordable and real value is achieved.

4. The factor carries out all the necessary ledger reporting to the insurer.