How trade credit insurance can deliver beyond protection for food and beverage businesses

Food and beverage businesses can use cover that indemnifies against bad debts to increase sales and profits.

Trade credit insurance is sometimes viewed simply as indemnification against bad debts. While this cover does indeed deliver protection from non-payment by customers, you can also use it to deliver a range of additional benefits that can boost resilience and the bottom line.

In this insight, we take a closer look at trade credit insurance and offer practical examples of how food and beverage organisations are using this type of cover to their benefit.

What is trade credit insurance and how does it help manage business risk?

Trade credit insurance provides cover to companies selling goods or services on credit terms for losses arising from non-payment by their customers. This non-payment can be the result of insolvency or political risk factors, or relate to customers not paying within an agreed period beyond the date their debt was due.

As reported in the Trade Finance Global, global insolvencies are predicted to increase by 19% during 2023, and with the current economic and geopolitical uncertainty set to continue, knowing your customer is vital. Trade credit insurance involves an assessment of your customers’ financial health so can provide early warnings on potential issues.

Under many trade credit insurance policies, insurers can provide anonymised payment performance insights as late payments can be the first sign a business is experiencing liquidity issues and can help you understand, for example, whether a prospective new customer is likely to pay you on time or drag its heels.

These payment insights can also tell you which of your existing customers may be under stress or at risk of failing allowing you to be proactive in your dealings with them and better protect the business from non-payment issues.

How could trade credit insurance help your food and beverage business grow?

Business growth is one of the key additional benefits trade credit insurance can help deliver. Having insurance cover in place can allow you to maximise credit limits to both new and existing customers with greater confidence.

As an insured company, you can gain a competitive advantage over those operating without insurance, giving you the confidence to expand into sectors and markets, perhaps providing credit facilities to customers you may not have considered without the protection of trade credit insurance.

Insuring trade receivables can help to obtain improved terms from a funder. Insurance can be used as an alternative to costly bank guarantees and letters of credit. Minimising bad debt provision by having insurance as a mitigant can allow a company to direct working capital elsewhere.

What trade credit insurance options are there for food and beverage businesses?

Trade credit insurance offers a variety of different policy types. These options range from policies that cover all the business your company does on credit terms, to structures that cover only single risks or your principal customers above an agreed level. You can choose excess of loss structures (covering losses exceeding a specified threshold) and there are supply chain finance programmes that are under-pinned by a trade credit insurance policy.

At WTW we’re seeing food and beverage businesses use trade credit cover in a range of ways:

• Enhancing internal credit control functions – We’re working with a large drinks manufacturer, for example, that’s using its trade credit insurance programme as a cost-efficient way of enhancing its in-house credit control functions. This company also uses its trade credit policy to reinforce existing credit management procedures and ensure they are being followed.
• Boosting potential profits by increasing credit limits with confidence – Some businesses are using the protection of trade credit insurance to increase customer credit limits. Let’s say you increase a customer’s credit limit from £1M to £2M as a result of having insurance cover in place. By doubling your credit limit you could also potentially achieve a corresponding increase in your profit with that customer as a result of the increase in business with them.
• Offsetting the impact of inflation and longer terms of payment – Inflation means even doing the same volume of business can increase your exposure to a customer. You can use trade credit to protect those inflationary increases in exposure. This can also apply where a customer is seeking longer terms of payment that would result in a higher credit exposure.

For expert perspectives on how trade credit cover could help your food and beverage business thrive in tough conditions, get in touch.