How Relevant Is Credit Insurance To A Business?

Customer credit is inevitable: To remain competitive, companies need to offer their customers credit payment terms.

However, this decision can lead to unforeseen contingencies such as customer payment delays, payment defaults or even insolvency.

In the Gulf region today, 80 per cent of companies are dealing with unpaid invoices and this situation is responsible for 25 per cent of companies’ closure in the region. These figures demonstrate that, when invoices remain unpaid, the supplier’s financial performance is affected and the business is put in jeop-ardy.

Credit insurance protects businesses from non-payment of commercial debt. This allows companies to reliably manage the commercial risks of trade, while optimizing chances of growth.

For the B2B market, customer credit forms the basis of the majority of business transactions, so much so that credit provided by suppliers represents double the amount lent by banks to their customers.

With an estimated average of 40 per cent of a company’s assets in the form of trade debts, accounts receivable are absolutely critical to the running of a business, and hugely impact cash flow and profitability if payment terms are not met.

Through credit insurance, companies take advantage of a comprehensive solution covering the three core elements of their trade cycle: information, protection and collection.

To begin with, they are able to make informed decisions while choosing their customers through a protective and preventive system based on assessments of the financial health and credit worthiness of companies and an understanding of their payment practices.

The key is having the best information about companies, sectors and economic trends to make informed credit decisions and therefore avoid and minimize losses. Early planning is crucial. Through the information cycle, companies can anticipate payment arrears and base future custom on their customer’s risk profiles to take the right decision.

Then companies keep their sales protected against potential losses arising from payment de-faults by their customers around the globe by transferring the risk to the insurer. This allows them time to focus on the growth and development of their business and its profitability by reducing exposure to the commercial risks of trade on account receivables.

Finally, in case invoices remain unpaid, the insurer collects payments on behalf of the insured or indemnifies for the loss, giving businesses the benefit of a steady and stable cash flow de-spite payment issues.

Indeed, out of the 8 billion euros of credit insurance premiums paid worldwide annually, 50 per cent is paid back to the insured in form of claim indemnification thus minimizing the impact of the losses sustained over time.

More than risk transfer, credit insurance is in fact a business development solution: insured suppliers can offer flexible and longer payment terms to their customers, placing them at an advantage over their competitors. Besides, contracting credit insurance also lowers borrowing costs by up to 20 per cent of trade finance facilities obtained from commercial banks.

Relying on a credit insurer is securing for all suppliers: the insurer provides dedicated risk experts who analyze financial performance of their customers. This analysis is then bench-marked with the customers industry trends so that, eventually, an informed coverage decision is made on the same customers.

Scalability is also key to the value and practicality of credit insurance. SMEs and multi-nationals use it as a tool to help manage customer credit risk, whatever its form – export, do-mestic or international.

Businesses with global operations can benefit from the economies of scale of having global cover with the local knowledge of small, mid and large scale customers.

While credit insurance provides the assurance of commercial debt loss indemnification, the ultimate goal is to help businesses avoid foreseeable losses through taking an informed and preventative approach to conducting trade safely.

Ultimately, in an increasingly competitive business environment in the Gulf – which is a hub for export and re-export –credit insurance is a business development tool.

On the back of a credit insurance solution, companies can now increase their sales volume by extending customer credit lines, explore new markets by securing upfront coverage on potential cus-tomers credit, and gain a competitive edge by becoming more reactive to purchase orders. With the comfort of credit insurance, a supplier can offer credit terms to his customers from first transaction.