Business Finance: On credit insurance
Small and medium-sized firms, which stand to gain most from credit insurance, are also traditionally least likely to use it. But all that is changing.
Most readers of Accountancy Age will know personally of a small or medium-sized firm that has been forced out of business by bad debt.
Every year thousands of apparently healthy enterprises disappear in this way. Typically, a customer might go into liquidation leaving behind unpaid bills.
Another big problem, despite recent legislation to protect the small businessman, can be late payment that squeezes cash flow.
One way to protect against bad debt is to purchase credit insurance.
Every year UK firms spend an estimated £320m in premiums for this type of cover. The sad irony, however, is that the very businesses with most to gain from credit insurance have tended to stay clear of it.
Credit insurance has traditionally been purchased by larger companies.
Their smaller brethren have regarded it, often rightly, as too complex, time-consuming and expensive.
Yet small firms are also the most vulnerable, with just one bad debt capable of causing redundancies or even closure.
Fortunately, there has recently emerged a new type of credit insurer that has made the whole process much simpler and more affordable.
Small or medium-sized businesses can be more selective, covering themselves on an invoice-by-invoice or single buyer basis. This is, of course, less comprehensive, but it is also much cheaper with premiums starting at around £100.
The key enabler here is the internet. It has been possible to buy credit insurance online in the UK since June, 2000 – a process that can take as little as five minutes.
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So, what should firms do if they are interested? One option is to go to a broker, though in practice there is a wide variation among intermediaries in their understanding of this subject.
- David Neckar is chief executive of coverclick.com, an online provider of credit insurance backed by Royal & Sun Alliance.
For information on insurers contact the Association of British Insurers, 51 Gresham Street, London EC2V 7HQ. Telephone: 020 7600 3333 www.abi.org.uk
For further information on brokers you can contact the British Insurance Brokers Association (BIBA), 14 Bevis Marks, London EC3A 7NT. Telephone: 020 7623 9043 www.biba.org.uk.