Self-insurance, credit insurance and factoring services – what’s best for business?

It’s one thing for companies to grow when the economy’s thriving but not all are faring so well now. Fortunately, there are many insurance options that can help – but some can make things even worse


Many businesses are in survival mode right now. According to the Office for National Statistics’ latest figures, business investment fell by 1.1% in the third quarter of 2018, the third consecutive quarter-on-quarter fall. In December 2018, the IoD’s Confidence Tracker of more than 700 company directors reported confidence was at its lowest level in over 18 months, with the outlook for investment particularly subdued. Meanwhile, UK productivity grew by just 0.2% in the three months leading to September 2018, the weakest growth since the third quarter of 2016 and way below the rate of other advanced economies.

Although it seems the odds are stacked against growth, businesses can still flourish provided they’re bullish. In this climate, companies with a static approach to risk can find themselves in a self-imposed straitjacket: unable to offer competitive credit terms to secure new customers and reluctant to commit too much of their own working capital to new projects in case they’re hit by a financial shock. Overall, it paints a relatively unattractive prospect for financial backers.

Of course, being so gung-ho to take on new clients can be just as risky as sitting on your hands, which is why having a top credit management strategy is a crucial piece of the puzzle. Whether it’s self-insurance or credit insurance there’s a variety of ways to get one but there are a few questions you must consider when making your decision.

Does your strategy financially tie your hands?

Many companies choose to create their own financial cushion and self-insure against customer insolvencies and other eventualities. While this avoids paying insurance premiums, the downside is it ties up money which could otherwise be put to better use. Factor this in when looking at cost.

Can you plan for absolutely everything?

A drawback with self-insurance is the money your business can afford to set aside may not be sufficient to cover potential losses. The failure of a major company within a sector can have huge implications for the whole supply chain. For instance, according to the Association of British Insurers (ABI) the collapse of Carillion, the construction company, in January 2018 resulted in credit insurers paying out a record £1m a day to help UK firms stay afloat. The ABI also revealed the claims ranged from £5,000 to several million, almost certainly beyond the means of self-insured suppliers.

Is it good value for money?

Trade financing options, which include an element of insurance, provide a degree of certainty but at a cost. For example, companies can sell their invoices to factoring services that typically advance 80% to 90% of the value and assume the non-payment risk. This accelerated payment means the company’s cashflow position is more stable, which allows for better planning, but in addition to a proportion of the invoice value a service charge will be incurred – usually based off a proportion of turnover.

Letters of credit can be useful alternatives when trading internationally but banks will usually demand both security and a fee in return for these. Instead, credit Insurance is a much more flexible and cost-effective solution to both of these.

Does it do more than just the bare minimum?

Any credit management strategy should fundamentally mitigate risks taken on by a business. While a letter of credit provides a level of this, it only applies to international trade and is limited to one customer, which means a new letter is required for everyone. Similarly, insurance offered by factoring services provides protection in the event of customer insolvency but unlike credit insurance, for instance, it doesn’t cover risks such as late payment, disputed debts, political, natural disaster or pre-shipment risks. 

Does it prevent time-wasting? 

Effective credit management must enable companies to trade from a position of strength. This is why the payment information held by credit insurers like Coface lets policyholders focus on the most profitable customers and steer clear of risky business. Moreover, having credit insurance in place is more attractive to finance providers and investors, which can  facilitate better borrowing terms. 

Most importantly, can you trade with confidence?

There’s no one-size-fits-all approach to credit management. Company decision-makers must find an approach they feel comfortable with and one that’s appropriate for the specific risks they encounter in their market. However, the guiding principle of any strategy should be it provides the freedom to not only trade with confidence but lets you take advantage of new opportunities. 

This article comes courtesy of Coface, the world-leading credit insurance specialist

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