Why consider non-payment insurance for your company?

Non-payment of an invoice, even a relatively small invoice, can hurt your company, especially if you depend on receiving a payment in time to pay expenses or if you rely on a small number of clients. When you add on the time and money you will spend trying to collect the debt, it becomes clear that non-payment of a contract costs more than the face value of the bill.

An obvious solution against bad debt is non-payment insurance or trade credit insurance: if your customer fails to pay you, your insurer compensates your company in the event of a non-payment.

Let’s begin by looking at the reasons why non-payment of a contract sometimes happens and the consequences for your company.

You’ve delivered your goods or services on-time and sent out your invoice promptly. But the due date comes and goes without a payment. This non-payment of an invoice has an immediate impact on your cash flow: you may not be able to pay your own suppliers on time.

You resend your invoice with a gentle reminder, but another month goes by, and the invoice remains unpaid. The consequences for your business become more serious. Your cash flow dries up even more, while you and your team are now spending more time and resources trying to collect the debt. Relations with the client may become frayed and tense. You consider calling in a debt collection agency. Office morale and business operations may suffer. 

Non-payment of an invoice is not a problem reserved for new customers. It can occur among your best clients – those with whom you’ve been doing a healthy business for years, governed by a contract that specifies the work or products you provide as well as the payment terms to which the customer has agreed.

Your customers may be experiencing delays in payment themselves. They may be enduring supply chain problems that are slowing down deliveries of components they need to manufacture the goods they sell. They may have an issue with the goods and services you have provided and are holding back payment until the matter is resolved. A bank credit line may have been withdrawn, curtailing their operating capital. The market may have turned down suddenly, impacting their sales and overall business model.

In the longer-term, an unpaid invoice is a lesson in the importance of having a credit management policy and monitoring the creditworthiness of your clients on a regular, ongoing basis, even after the onboarding process has been completed.

When non-payment of a contract happens, correctly and swiftly communicating with clients about their past-due invoices is imperative. When phone calls and reminders are unheeded, it’s time to write a non-payment letter. 

This letter has two objectives: to retrieve the non-payment and maintain good customer relations. With that in mind, your non-payment letter should be respectful, concise and specific.

If follow-up letters are necessary, they should gradually become firmer in tone, but each non-payment letter should be written on your company letterhead, include your signature and contain the following information:

• Paragraph 1: In one sentence, explain that you are writing about a past-due invoice.
• Paragraph 2: Summarize in bullet points the details of the past-due invoice, including invoice tracking number, the principal amount, any interest or fees and a description of what the original balance is for—including dates and locations.
• Paragraph 3: In one sentence, thank the recipient for swift payment and suggest a call to discuss terms.

There are several solutions you can put in place to mitigate against non-payment or to collect when faced with non-payment of invoices.

1. Self-insurance and bad debt reserve: building up your own financial reserves to cover your losses in the event of non-payment. It is the simplest solution administratively speaking, but you bear the entire credit risk exposure, and damages can be significant in the event of default on a major contract. As opposed to non-payment insurance, do-it-yourself debt collection is time-consuming and can be expensive.
2. Letter of credit: this is a promise from your client's bank to pay you when you have certified the proper execution of your obligations (delivery, nature and quality of the delivered goods or services, paperwork, etc.). It’s security against unpaid invoices for both you and your customer because the risk of non-payment is transferred to the bank. However, this letter must be renewed for each transaction.
   
3. Factoring and invoice financing: this brings in a third party, called the “factor” to purchase the debt at a discount (typically 70% to 85% of the total invoice). This may be the best solution for minimizing your risk exposure and recovering the cash as quickly as possible without mobilizing any collateral. But these contracts are expensive in terms of fees (1 to 4%) and only cover a portion of the debt. 
   
4. Non-payment insurance: also called trade credit insurance, it is the most complete solution for bad debt protection. It protects your company against non-payment of invoices by covering your receivables due within 12 months against unexpected commercial and political risks (customer bankruptcy, changes to import and export regulations, etc.).

If your customer fails to pay you, your insurer covers your loss. But how else can non-payment insurance be useful to your company?

Non-payment insurance also safeguards your cash flow and helps you manage your accounts receivable more effectively – for example, structuring re-payment schemes for unpaid invoices. Many SMEs simply lack the clout to achieve these results on their own.

Non-payment insurance also supports your business by:

• Saving your business considerable time and money. According to Tide, in 2020 SMEs in the UK were chasing an estimated £50bn in late payments, with on average five outstanding invoices at once for each business, representing an hour and a half of labor every day.
• Providing monitoring and financial information on your customers and prospects – such as their creditworthiness – as well as knowledge of the marketplace. These insights are valuable components of creating a successful strategy and help you make better-informed decisions.
• Promoting business expansion. Non-payment insurance is more than a risk management product. It is also a commercial tool. Knowing the risk of non-payment of an invoice is covered gives you the freedom and opportunity to be more competitive in your business activity. You can enter new markets with confidence and make competitive offers to your prospects while protecting your cash flow. Your trade credit risk insurer is a true partner who advises you and accompanies you throughout your commercial development.
• Financing support. Lenders consider non-payment insurance an asset as part of their loan decision process.

Remember, even though you have followed all the rules, you can still be subject to unpaid invoices and contracts. Trade credit insurance can be the answer.