Survive The Non-Payment Storm

We all know that the economic situation for SME’s is tough right now,. As households feel the pinch small businesses can see revenue, footfall and profit shrink.

With global issues such as supply chain disruption, labour shortages and higher outgoings it’s clear to see why businesses are facing a less hospitable environment.

The most recent Small Business Index from FSB shows that nearly half of SMEs surveyed did not expect to grow in 2022 as the cost of doing business rises and consumers disposable income drops. This is supported by recent UK Government figures that show more than 5,000 companies registered for insolvency in Q1 of 2022, more than double for the same period in 2021.

In a recent report in The Guardian FSB Chair Martin McTague cited ONS statistics that indicate 40% of the UK’s SME’s had less than three months' worth of liquidity to support their running costs:

 

McTague pointed to figures from the Office for National Statistics, which showed that 40%, or 2m, of the UK’s small businesses had less than three months’ worth of cash left to support their operations. Of those 2m, the FSB chairman said about 10% – or 200,000 – were in “serious trouble”, and that another 300,000 “have only got weeks left”.


Almost 500,000 UK small businesses ‘at risk of going bust within weeks’ - Guardian - 30.5.22

In fact our partners at Allianz Trade were beating the drum about a cash flow drought as far back as February.

With more highly integrated supply chains than ever before, the increase in ‘Black Swan’ events such as Brexit, COVID-19 or the war in Ukraine, makes the danger to companies, even those with a healthy balance sheet high.

This is due to what’s known as ‘The Insolvency Domino Effect’ where a business can be adversely affected if other businesses in their sector, customers or supply chain providers go bust.

It can definitely seem a very challenging time to be running your own business, but you don’t need to be exposed to this risk unsupported. There’s an insurance product that can help shield you from the danger and stop your business ship sinking in the storm.

Trade Credit Insurance - Your Small Business Protection

You might think that Trade Credit Insurance is a must have cover, but many FSB members feel that it can be too complex and too expensive. This insurance is an affordable and quick solution that protects your business against bad debt.

Why Trade Credit Insurance Is Right For Your Business

With UK business insolvencies running at their highest level for a decade, the financial protection against a major customer collapse that Trade Credit Insurance provides is vital.

But Trade Credit Insurance can do much more for small and medium-sized businesses. Here we uncover five additional key benefits that it can provide:

1. Faster Business Growth

Trade Credit Insurance allows order volumes with fast-growing customers to be increased rapidly. If the policy covers the invoices, orders will not need tight credit control while assessing creditworthiness, enabling faster business ramp-up.

This benefit is particularly valuable for export customers where checking creditworthiness can be a challenge.

David Edgell, Regional Commercial Manager at Allianz Trade shares a powerful case study of a UK chemicals firm with an £18m turnover.

A client in South America offered to raise orders from almost zero to £7m of product a year – but only on open credit terms. Thanks to its network in South America, Allianz Trade was able to assess the potential client and approve Trade Credit Insurance, enabling the UK firm to quickly increase turnover by nearly 40%.

2. Extra, Vital Information During Request For Proposals (RFP)

Getting a tender or RFP can be a crucial opportunity. But can you be sure the contract is really worth winning? And how should it be priced?

Your firm may have been approached not because of great products and services, but because a company’s existing suppliers refuse to do business because of unpaid invoices. A discussion with a Trade Credit insurer can offer reassurance that this is not the case. If the insurer is happy to extend cover, this implies the business has a sound record of payment.

This information can also be used to fine-tune pricing, a critical issue in industries where fixed-price contracts are standard, such as construction. If the credit insurer is offering 100% cover, this indicates a strong payment history, which means prices offered can be keener, again helping faster business growth. However, if the insurer only provides partial cover, it may be necessary to add a pricing buffer to compensate for possible late payment.

Allianz Trade’s David Edgell comments:

 

Trade Credit Insurance allows you to take on additional work safely and securely, whether it’s a new customer or expansion from existing customers.

 

3. Reduced Costs

Your finance staff can spend a lot of time assessing new customers for credit and monitoring existing ones. Your business may also have to pay to access credit databases. Trade credit insurance can significantly reduce these costs.

Trade Credit insurers can also typically handle the collection of overdue accounts - their scale and automation making them highly efficient at this. If the insurer also has an overseas network, these savings can be particularly significant, as a DIY approach to overseas collections can be complex.

For exporters, a policy can also reduce the need to buy letters of credit and the costs of processing them.

One of the most painful hidden costs in credit monitoring is that sales staff often have to spend time assessing their leads for creditworthiness, instead of doing what they do best — winning new orders!

4. Balance Sheet & Funding Benefits

A business that uses trade credit insurance can be more stable - and banks know this. Many firms using trade credit insurance report that banks are prepared to offer better funding terms because of perceived lower risk.

Trade credit insurance also means firms that keep a bad debt reserve can potentially reduce its size. The capital freed up can be used for a much more useful purpose - growth. This can also be more tax-efficient, as trade credit insurance premiums can be offset against tax.

5. Peace Of Mind In Difficult Times

The current business environment is proving challenging for many firms that had hoped for faster business growth but have been hit by higher taxes, rising costs for labour and pricier raw materials.

In addition, shortages of stock or raw materials due to lockdowns in China and other supply chain problems are also impacting growth. The Insolvency Domino Effect means businesses can be dragged down by the failure of a firm which isn’t even a customer or supplier.

In this environment, protecting cash flow is critical. Martin McTague, FSB Chair, warned in May that:

 

A worsening late payment crisis is currently threatening the futures of more than 400,000 small firms.


Queen’s Speech: Turn kind words into action, small firms urge, as they call for more on late payment - www.fsb.org.uk - 10.5.22

For many businesses, the collapse of a customer may be enough to push them into insolvency. Here Trade Credit Insurance not only plays a crucial financial role but by removing a potential source of business failure, it can also improve peace of mind.

Are you ready to investigate how Trade Credit Insurance from Allianz Trade can help your business? Click here now to begin your journey.