• Companies are increasingly looking at trade credit insurance as an investment, not a cost.
  • The direct returns are substantial; indirect and strategic returns may be larger still.
  • One of the biggest returns is helping accelerate growth amid today’s highly uncertain business environment.
It’s often said that spending money on health is not a cost but an investment; increasingly, many companies think the same about trade credit insurance.

 

These firms are looking far beyond the narrow trade-off between premiums paid and claims made. Instead, they are taking an ROI-led approach that acknowledges the many additional benefits of trade credit insurance, potentially including improved efficiency, lower finance costs, and higher growth.

 

These benefits fall into three broad categories: visible returns; returns that are hidden (but very real); and the strategic opportunity, where the potential returns are potentially greatest.

 

The benefits of trade credit insurance

The first and most immediate benefit is being reimbursed for losses like any insurance product. But some companies underestimate how valuable this is.

Charlotte Champagne, Head of Product at Allianz Trade UK & Ireland, comments: “If a customer doesn’t pay, it’s not just your margin you’re losing. You’re losing everything.” The maths is simple: a company with 10% margins that has a £5,000 default doesn’t have to sell an extra £5,000 of goods to recover — it has to sell an extra £50,000.

Laura Flandin, Head of Commercial Underwriting, adds: “If you have low margins, one unpaid invoice can have a huge impact on your balance sheet.”

But there are many other immediate financial benefits. Mid-sized firms will often have a full-time credit controller, analysing new customers in detail and constantly monitoring existing ones. As well as this cost, there are usually data expenses such as access to credit report databases.

Laura says: “A clear advantage of trade credit insurance is that we not only say how strong the customer is, we say at what level it is safe to be trading with them.”

An additional direct cost saving is a sharp reduction in collection costs, usually paid to lawyers or collection agencies. These savings can be particularly welcome for overseas collections, where processes can be complex or unfamiliar.

Large trade insurers generally have a better reputation than many collection agencies when recovering unpaid invoices. They want to recover the debt, true. But unlike collections agencies they have a financial incentive in the two firms continuing to trade. Laura comments: “We have a vested interest in collecting and being super-efficient. But we are totally conscious that our customers may want to continue to trade with their customers.”

Additional hidden (but very real) returns

It’s easy to underestimate these hidden associated costs when companies do their own credit control and collections.

Many staff get entangled with the process, even if it is not their full-time job. One of the most painful, potentially, is the time taken up by sales staff who often get involved in credit control issues, especially for new customers. They should be doing what they do best — winning new orders.

But there are other indirect costs that can be saved with trade credit insurance. There is a greatly reduced need for letters of credit for export orders. These are expensive and use up bank facilities.

For firms reliant on bank funding, it is possible that after taking credit insurance banks may offer better rates because of increased confidence in collections and a reduction in days sales outstanding. (DSO is a vital metric and any business benefits in improving it.)

Plus, there are very substantial information benefits. A customer in financial trouble may pay you on time because your product is essential, so their eventual collapse may come as a complete shock. However, a trade insurer will typically see their financial distress in advance, either through a deteriorating payments record with less-critical suppliers or through on-site visits. This enables proactive risk management.

The strategic opportunity

For most firms, the visible and hidden returns add up a very positive ROI.  However, the real return to the business is greater still, and the largest element of this is the ability to accelerate growth. Instead of slowly building order volumes with a new customer over months (or longer), large orders can be booked immediately if the insurer approves the credit line.

Ana Boata - Global Head of Macroeconomic and Sector Research

David Edgell, Allianz Trade’ Regional Commercial Manager, has a powerful case study of a chemicals firm with turnover of around £18m that had a South American client taking just £5,000 of product a year with pro forma invoicing (cash before delivery).

The client said it would take £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 client and approve cover up to £1.5m, allowing the UK firm to increase turnover by approaching 40%.

David comments: “Thanks to the new profit streams, and to the confidence they now had to trade with new and existing clients, my client’s turnover went from £18m to £25m in a year.”

This type of opportunity is startling enough, but more opportunities may be missed by clients who assume credit won’t be available so who don’t ask for a tender.

The ability to rapidly increase business with creditworthy customers is a clear strategic advantage in competitive markets. It stands in stark contrast to the many firms that are responding to continuing business uncertainty by moving to pro forma payment. Insisting on cash upfront may look like a way to protect the business amid the uncertainties of Covid-19 and supply chain disruption; in reality, it is a policy that can choke growth and potentially drive away customers.

In contrast, investing in trade credit insurance allows a company to quickly onboard creditworthy customers and do substantial business with them.

Peace of mind is a benefit too

The final return is perhaps the most difficult of all to measure: peace of mind. Insurance is routine in business to protect assets, and for most companies accounts receivable is one of their largest. Trade credit insurance has for around 170 years helped secure that asset and helps senior managers focus on the upside. This is particularly the case in an environment where a company failure can have a domino effect that ripples unpredictably though supply chains, potentially causing problems with firms who had no commercial relationship with the firm that failed.

All these returns may seem a long way from the direct, financial benefits previously mentioned, but they are no less real — indeed, they can be considerably more valuable.

Laura says: “In the current environment, companies are looking carefully at where they’re spending their money. Even companies that have cash, face challenges such as rising costs and supply chains. But they really should be considering investing in trade credit insurance.”