Careless credit risk exposure can damage your cash flow

The Better Payment Practice Group [BPPG] is urging UK businesses to resist the temptation to clinch a sale or deal without thoroughly vetting the potential customer first. The BPPG is concerned that companies are leaving themselves dangerously exposed to the risk of customer payment defaults and, potentially, their own insolvency by taking too many risks, particularly when business is scarce.

Firms are now being strongly advised to minimise the risks they are exposed to by tightening up their credit management practices, and if necessary by ensuring that they have adequate credit insurance protection.

Credit insurance provides indemnity against the non-payment of invoices and typically insures payment of 80% to 90% of the value of a debt. The cost would depend on the type of cover required and the advantages may include:

• Protection against the consequences of a customer’s unforeseen insolvency or protracted late payment.

• Indemnity against both foreign commercial and political risks: This is of particular value to UK export companies, which can benefit from protection against currency convertibility problems, export and import restrictions.

• Enhancement of the company’s overall credit management function: A good credit management policy encompassing thorough vetting of new and existing clients can significantly reduce the risk of late payment. By complementing these measures with credit insurance, the credit management function can greatly ease the restrictions on cash flow.

• Aid to obtaining Trade Finance: Credit insurance can help companies obtain funding, as insuring the receivables ledger is seen as added security by the lender.

Dominique Vaughan Williams, Chairwoman of the BPPG and representing the Association of British Insurers’ Credit Committee commented: “In the current climate, it is important that businesses recognise the heightened risks involved in credit trading. We’ve seen a string of high profile companies, which were previously thought unshakeable, run into financial difficulty over recent months and this has served as a stark reminder that no company is infallible.

“Businesses can’t afford to stop trading when the risk stakes are raised, but equally, they must carefully manage their exposure to that risk. Credit insurance offers a realistic solution as it provides a way of minimising risk without limiting the opportunities for business growth.”

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