Trade credit insurance protects a business against the risk of not being paid for goods or services sold on extended payment terms. But whilst there may be a few good reasons for not needing it in specific cases, most arguments we hear in the market are misconceived and expose companies to significant financial risks. Particularly in the current volatile times.
1. My business doesn’t need credit insurance
The repercussions on businesses can be devastating without cover to protect against the possibility of payment breakdowns. Smaller businesses are particularly vulnerable. Few thriving businesses function in isolation – their success can be significantly affected by the collapse of companies they depend on or engage with. This is especially true given the increasing number of insolvencies across the nation. Businesses continue to face tough economic conditions, including elevated interest rates, high energy costs, and, in many cases, substantial operating expenses due to the measures outlined in the Autumn Budget 2024.
In the UK, insolvencies have surged dramatically since the unprecedented low point during the Covid-19 pandemic, following the cessation of the government's £69bn financial support and temporary insolvency reliefs provided to help businesses during the crisis. While the insolvency rate in England and Wales has slightly decreased since then, it remains higher than pre-pandemic levels as of late October 2024, according to the Insolvency Service.
2. All of my customers are financially secure, and I know them well
The economic cycle consistently shows us that even the most established businesses are vulnerable to collapse during times of financial instability. The recent failures of ISG Group (opens a new window) and Buckingham Group (opens a new window) serve as stark reminders that no company is immune to failure.
Reviewing the latest financial statements of these companies, it's likely that most businesses would have been eager to extend generous credit to them. In fact, suppliers to both firms were heavily covered by credit insurance, and through the credit insurance programmes managed by Lockton, many of our clients have successfully had their claims settled and funds quickly returned to their businesses.
3. Insurers only cover good risks
Insurers can’t predict the financial performance of a company. They can only make educated guesses and underwrite the risk accordingly.
In Q2 2023, for example, following the Covid-19 pandemic the number of company insolvencies in England and Wales were up 13% compared the same period of 2022, according to The Insolvency Service (opens a new window) official statistics.
Trade credit insurers did not foresee this jump in insolvencies and insurance payouts to firms with unpaid bills rose even faster, increasing by 23% in the first half of 2023 compared to the same period in 2022, according to data from the Association of British Insurers (opens a new window).
These insurance payouts helped businesses survive bad debts that were not foreseeable. Heightened economic volatility has made business performance less predictable for all market participants.
4. We’ve never experienced a bad debt
Many businesses claim that they don’t need credit insurance because they have never had bad debt. But they buy building insurance although they never had a fire or a flood.
Experiencing an unexpected bad debt can severely impact, or even completely wipe out, a year's profits and, in some cases, lead to business failure. Just because it hasn’t happened before doesn’t mean it won’t in the future. Credit insurance offers peace of mind, knowing that if the worst occurs, your business is safeguarded.
Regardless of how robust your credit management is, there's no guarantee you'll get paid, especially in today’s economic climate. Company accounts are typically at least 9 months old, and in some cases, they can be as much as 21 months old – not accounting for any delays in filing. Relying on outdated information in an unpredictable economy is risky at best.
When major companies like Buckingham Group and ISG Group go under, the repercussions are far-reaching, disrupting payment streams to numerous suppliers and partners. Buckingham’s debts exceeded £108 million, and ISG Group’s amounted to a staggering £340 million, wreaking havoc across the entire supply chain in what’s often referred to as the domino effect. While you may feel confident in your relationship with your customers, if they were to face a significant bad debt due to a failure like that of Buckingham Group or ISG Group, would they have the financial stability to pay you?
5. It’s too costly
For most businesses, credit insurance is quite affordable and, in fact, it’s around 30% cheaper than it was five years ago. Beyond offering protection against bad debts, it also delivers valuable customer insights, adding significant benefits. Many insurers also offer debt collection services and contribute to collection expenses.
A skilled credit insurance broker brings extensive market knowledge, ensuring you secure the most favourable terms and coverage.
In uncertain economic times, responsible business leaders must consider how they can justify the risk of not having insurance to protect against bad debts – a £100,000 bad debt, a company with a 10% profit margin would need to generate an additional £1m in revenue just to break even.
6. You need to insure everything
A common misunderstanding about trade credit insurance is the belief that you must insure everything. While comprehensive coverage is often the best way to manage risk, full turnover insurance isn’t the only choice, and it may not suit every business. There are various policy structures available that allow companies to focus on specific risks related to their operations, offering a more tailored and efficient solution than full coverage.
7. Insurers cancel coverage or reduce limits when it's needed most
When coverage is cancelled, it’s typically because the insurer has received negative or updated information about a buyer, often based on details not publicly available. Businesses often view this not as a problem but as a useful alert to changes in their risk exposure, acting as an ‘early warning system’ that can help them avoid bad debt or at least prevent increasing their exposure at the wrong time.
Any adjustments to coverage only apply to future transactions or services, not retrospectively. Furthermore, insurers typically provide 30 to 60 days' notice of any changes, offering ample time to investigate the reasons behind the decision.
For companies that want certainty in their coverage, non-cancellable credit limits may be available, removing the risk of insurers withdrawing coverage.
Even with all the data at their disposal, insurers can’t predict every business failure, which is exactly why credit insurance exists – to protect against the unforeseen.
8. Credit insurance creates an admin burden
Of course, drawing up a made-to-measure insurance policy requires spending some time to gather and provide details to a broker. But a good broker will provide assistance and let you know exactly what is needed in the easiest format. Once this initial onboarding is done, the policy should sit comfortably alongside existing credit control practices and would rarely add any significant burden to your existing processes.
9. Credit insurance restricts sales
The opposite is often true. Used properly, credit insurance is a great tool to promote growth securely, expand with new and existing customers or into new markets. Concentrating sales efforts with credit worthy customers means time and effort is saved, increasing productivity within the sales cycle. Using the insurance policy as security can often lead to improved funding which can be used to enable expansion of the business.
10. Self-insurance is more affordable
Why bother with credit insurance if I already have enough financial cushion to absorb the loss if a client’s business fails? While this might sound reasonable, it’s a solution that often falls short. Beyond the immediate cost of unpaid debts, the collapse of a large business can trigger a domino effect, causing many of its suppliers to fail within months, disrupting the entire sector. Does your business have enough cash reserves to handle the loss of a major customer or a number of customers in such a short period? Does your business possess the expertise to recover debts? How about understanding local laws, payment practices, and specific regulations?
Self-insurance works as long as your business partners meet their obligations. But are you fully aware of the potential risks your company faces? Your business’ operations—both domestic and international—require you to extend credit to clients regularly, which exposes you to the risk of a default or bankruptcy. If that happens, unpaid invoices and outstanding debts could drain your cash flow, potentially threatening the survival of your business.
Self-insurance often demands more resources—both financial and human—than anticipated. It involves gathering and analysing your partners’ financial data, handling commercial and financial disputes, deciding on credit limits, collecting overdue invoices, assessing the solvency of debtors, and navigating out-of-court negotiations or legal actions. The truth is self-insurance is essentially the same as having no protection at all. You’re taking uncalculated risks, with no guarantee that your company will be shielded from financial loss.
To find out more, please contact a member of the team or visit Lockton’s Trade Credit Insurance page (opens a new window).
