Why credit insurance is important in this economic climate

What is credit insurance?

Written by Andrew Smith, Client Director.

Credit insurance, or debtor insurance, covers you in the event that a customer becomes insolvent or cannot pay due to financial difficulty. The specific area of coverage is the most outstanding at any one time on any given payment terms set per customer. You can cover your whole book of customers or specific customers, depending on how you view the risk to your business. 

Who needs credit insurance and why?

With an ever-changing trading environment across multiple industries, it is key to have stringent credit control and a good financial understanding of who you’re trading with. Credit insurance is applicable to any business that trades on credit terms with goods sold and delivered or services provided. 

Businesses often trade with many business partners for many years and enjoy a good relationship. However, with so many trading factors facing businesses, an increase in tax across industries (such as the National Insurance increase), as well as changes within the global markets (including new trade deals and tariffs), we’re seeing a reorganisation of established supply chains and international import and export. 

The increase in the cost of materials is an especially important factor for industries such as manufacturing and construction. For manufacturing, these fluctuating costs mean material costs may need to rise and fall quickly to react to changes in the market, and manufacturers must either raise their prices or absorb the loss. Raising prices risks losing them customers, while keeping prices the same leads to reduced profits or potential bankruptcy. And, in a more precarious economic environment, it’s harder for them to plan and allocate funds for this. In the construction industry, businesses saw an increase in building material prices for all work, which rose by 3.5 per cent year-on-year in December 2024, making budgets tighter and tighter. 

In general, businesses are facing much higher running costs to keep their business going. For example, there are universal increases like the cost of electricity, with it being 75 per cent higher in 2024 than the average price at the start of 2021. 

The challenges and changes all play a part in creating a more precarious market, and we often see cash flow issues arising. This can then change the financial security of a business trading and the ability to pay their suppliers. This may not only damage their relationships and reputation, but may also cause what could be significant losses, depending on how disruptive a non/delayed payment could be and how long you could be waiting. 

A credit insurance policy would allow for you to cover your customers and then enable you to be comfortable to trade, knowing your customers are covered in the event they cannot pay or become insolvent.

How can a credit insurance policy help?

To grow a business, you have to take on new customers and increase your turnover, as well as increasing trade levels with existing customers. Having a credit insurance policy will allow you to cover your customers and also increase credit levels, knowing you have cover available to do so. Therefore, the policy can assist in growing your business. Avoiding having to go into cash reserves to pay a bad debt also frees up cash flow and will not then have an impact on your own financial performance from a bad debt perspective. 

We’re finding that businesses are changing their credit terms to protect themselves and to get outstanding balances paid more quickly, whereas their customers want extended credit terms to manage their own cash flow. 

A big positive of a credit insurance policy is that it will allow you to get access to live financial information from the insurer on businesses you already trade with or want to trade with. The insurer has other policyholders and, where there is a crossover of customers, the underwriters are constantly looking at risk levels, changes in accounts, financial performance, and notifications of overdues from other policyholders. This level of information is not always publicly available and, if it is, it can sometimes be out of date or extremely time-consuming to collate and analyse. Credit insurance therefore gives you a real edge on knowing information before the rest of the supply chain.