Insolvencies – how to protect your company against the cost of a bad debt

The last few months have seen a number of high profile business failures. Both Carillion and Palmer & Harvey had turnovers in the region of £4.5bn and since Christmas, Toys R Us and Maplin have also failed, whilst other companies are rumoured to be in difficulties. During 2017 Corporate failures rose by 2.5% and payouts from credit insurers hit a nine year high up 7% since 2016, paying out the equivalent of £4.3m per week. Economic forecasts suggest 2-3 years of low growth and interest rates are likely to increase albeit slowly in a response to recent inflationary pressures. With this in mind and with further uncertainty caused by Brexit you might want to consider how to protect you company against bad debts.

Credit & Business Finance (CBF) are specialist credit insurance brokers and are proud to have won the CICM “Credit Insurance Specialist of the Year” for both 2017 & 2018. As market leaders we thought we would take the opportunity to explain how our market works and what steps a company can take to protect itself from the effects of bad debts.

CBF Managing Director, Trevor Price, explained that there are three ways a company can effectively insure. Firstly, through bad debt protection bought through a bank normally as part of an invoice finance facility, secondly by directly approaching an insurer and thirdly by using a specialist broker such as ourselves.

Perhaps the easiest option for a company looking to protect itself from bad debts is via its invoice finance facility. However, as is often the case, the easiest option is not necessarily the best. No doubt a company is using a particular bank due to its lending criteria and not because of the strength of its bad debt protection!

Whilst a funder’s bad debt protection (BDP) scheme might work well for a very small business with turnover up to say £1m, you are effectively buying an “off the shelf solution”.  BDP cannot insure a company’s work in progress, pay when paid contracts, pre-credit risk, offer binding contract cover or normally insure construction contracts (although there are a couple of funders providing the latter).

Buying BDP from a bank is also typically more expensive than a credit insurance policy as the funder looks to make a margin on the price it pays compared to the price it sells on at. There are occasions when we have saved companies 50% of the cost of protecting themselves against bad debts when switching from BDP to Credit Insurance.

The second route to obtaining bad debt protection is to take a credit insurance policy direct with one of the insurers. This severely limits your choice as the vast majority of insurers will only issue a policy through a broker. Additionally, many people believe that you are likely to pay less if you buy your cover directly from an insurer but the reverse is true. Once insurers are aware that you are comparing their product against the rest of their competitors, market pressure forces the cost down. Trevor Price states that “it is not unusual for us to be appointed to directly insured cases once a company becomes aware of the more sophisticated broker route to market and when we are appointed we would expect to significantly reduce the cost (up to 35%) without necessarily changing insurers!”

Lastly, a company can instruct a broker to act for them. The vast majority (95%) of credit insurance policies are brokered by specialist brokers such as ourselves. With 14 companies offering credit insurance in the UK, brokers are able to find the most cost-effective policy offering the most insured coverage. This is especially important if your invoice finance facility requires an insured credit limit. A lack of insurance cover could restrict the drawdown of funds and therefore hold back a company’s ability to grow.

A broker will bespoke a policy to your requirements so that the credit insurance policy fits with how you work, so that you don’t have to change the way you work to fit in with the policy! The policy can cover, pre-credit risks, Work In Progress, Contractual Work, Pay When Paid Terms of Payment, Work Done on Site, Variations and Consignment Stock. You may also require political risk cover if you export to certain territories.

Key to any credit insurance policy is credit limit coverage. A good credit insurance broker will know which insurer is insuring which risks and can use this knowledge to leverage cover from the holding insurer. The broker will be able to find out what information is required to support a limit and help to obtain this. In some cases, a broker may be able to obtain top up cover from another insurer in the market.

Most importantly, a broker is FCA regulated to act in your interests. They are there to advise on policy compliance and to ensure a claim is paid in a timely fashion.

In conclusion, whilst some banks can provide bad debt protection and whilst it is possible to deal directly with a few insurers, experience shows us that you will obtain the best credit limit coverage and the cheapest price by using a specialist broker. As your broker shouldn’t charge you for this service, why wouldn’t you use an expert?

CBF are independent specialist credit insurance brokers and are proud to have been awarded the Chartered Institute of Credit Managers, “Credit Insurance Specialist of the Year” in both 2017 & 2018. For further information contact Laura Prime on 01279 722555.

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