Does credit insurance mean anything to you? Have you ever heard of it, but its meaning escapes you? Do you vaguely know the principle without going into details? Here is everything you need to know about the operation of this guarantee, which is aimed at small and large businesses, in 5 key points!
1. Definition of credit insurance
The principle of credit insurance is simple: it is a guarantee that protects you against the risk of non-payment. If the relevance of this type of protection does not seem obvious to you, think of the fact that unpaid debts are involved in a quarter of business bankruptcies throughout the European Union! Because not all societies have the backs strong enough to absorb delays in the payment of bills.
Since companies cannot verify in real time what is happening with their customers, the credit insurer offers expertise on these via a rating system that evolves according to their financial situation. The insurance premium thus depends on the good health of the client: well noted, it will cost less to insure. And vice versa.
2. Prevention and recovery services
Generally, credit insurers (for example Coface, see here) offer 3 services to their policyholders:
Prevention: because the least serious non-payment is the one that is avoided! A credit insurer analyzes your customers and draws conclusions about their state of health. You have the opportunity to refuse a sale to a client who is in a difficult economic situation, or impose a more secure payment system.
Collection: in the event of default, the credit insurer is responsible for collecting the bills due directly from the faulty client.
Compensation: if you cannot recover your outstanding payments, the insurer compensates you for the loss incurred, up to a rate fixed in advance.
3. A guarantee for everyone
In theory, any business can take out credit insurance, but it is not mandatory to do so. In some cases, this protection is also unnecessary, for example in the context of B2C transactions (if your customers are individuals) or if you sell exclusively to public bodies.
On the other hand, if you work in B2B and your structure does not have a service dedicated to credit risk (therefore monitoring the financial state of customers and prospects), the choice of credit insurance is wise. SMEs, in particular, have everything to gain by protecting themselves with this insurance product.
4. Indispensable cover for export
There is however a case in which a company is encouraged to obtain credit insurance: that of exports. As soon as you work with foreign companies or governments, your client risk increases, sometimes exponentially in the case of countries prone to political crises or natural disasters.
A specific guarantee – export credit insurance – allows you to benefit from dedicated protection, with a compensation rate which can go up to 90%. Practical, when you are unable to gauge the risks to which your partner countries are subject. Of course, it is more difficult, if not impossible, to be insured if you trade with Syria rather than with a stable country like Australia.
5. A significant gain in serenity!
Credit insurance has a cost – between 0.1% and 1% of turnover to be insured – which varies according to many criteria: number of customers, nature of customers (domestic or foreign), geographic areas concerned, amount overall transactions, etc. More rarely, it is possible to negotiate a lump sum contract.
But for a company, the gain brought by such insurance is not only counted in quantified amounts. The role of an insurer is at least as much – if not much more – in prevention than in debt collection. And this aspect of the contract is validated by a know-how that companies can rarely deploy by themselves.
Your insurer refuses you the cover of a certain customer in certain country? You can adapt your business strategy accordingly, and not take this risk. Does your guaranteed outstanding fall on such a company? You have the opportunity to renegotiate your payment terms with the client in question, without jeopardizing your business relationship.
Credit insurance is therefore a factor of serenity in trade. A criterion also recognized by banks which, when granting professional credit, will welcome the existence of this guarantee!