The food and drink industry has faced significant challenges in recent years, with ongoing global geopolitical instability and uncertain financial climates exacerbating the situation. In this context, trade credit insurance has emerged as a vital tool for businesses seeking to mitigate risks and drive growth. This article explores the importance of trade credit insurance in the industry and its role in addressing current challenges.
Inflation and elevated interest rates have had a notable impact on the financial health of many businesses in the food and drink sector. While inflation has seen some decline, its effects continue to ripple through the industry. Trade credit can help mitigate the impacts of higher inflation. As prices rise, suppliers face increased risk exposure due to higher costs per order, necessitating greater credit. Trade credit insurance addresses this issue by allowing suppliers to maintain their business volumes without the worry of increased credit exposure.
Moreover, higher inflation often prompts stricter monetary policies from central banks, leading to increased costs for industries like food and drink and potentially resulting in more defaults from struggling customers. Trade credit insurance acts as a safety net, providing reassurance to both suppliers and finance providers.
For companies aiming to grow, trade credit insurance has proven to be a valuable asset when seeking finance. Suppliers looking to expand capacity for new orders require substantial upfront investment and financing support. Having trade credit insurance, particularly from a highly rated insurer, can simplify the process of securing this support. Banks are more inclined to offer credit when they know that insurance will cover potential cash flow disruptions caused by customer defaults.
High-interest rates affects all businesses but poses a particular threat to heavily indebted companies, which may struggle more as refinancing becomes costlier and can lead to financial instability and potential insolvency. Trade credit insurance can help to reassure finance providers, potentially increasing the credit available to support investment programs.
Despite these challenges, there has been a robust demand for new business from trade credit insurers in the food and drink sector, particularly where inflation and energy price fluctuations can be passed on to customers. Insurer interest in the Wholesaler and Grocer segment has been growing, addressing capacity issues observed since 2022. Top-up solutions have helped maintain coverage to meet customer exposure needs, whether due to new business or inflation-driven increases for existing clients. Several insurers are now actively offering this coverage, contributing to its growing popularity.
Policy structures that ensure non-cancellable credit limits and greater policyholder discretion, such as excess of loss solutions, are also gaining traction. Using trade credit insurance to drive growth and gain a competitive edge by expanding into new markets is increasingly recognized and appreciated. Leveraging trade receivables to improve funding terms has been a key growth factor for trade credit insurance, a trend that continues as companies and banks seek to use the product to secure and enhance financing options.
Supply chain finance programs backed by trade credit insurance have become more popular. These programs enhance supply chains by offering early settlement options based on the purchaser's financial strength, providing suppliers with better terms than they could obtain independently.
In the face of ongoing global instability and uncertain financial climates, trade credit insurance has proven to be a lifeline for businesses in the food and drink industry. To effectively leverage its benefits, businesses should consider the following strategies:
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This can mitigate the risks associated with inflation and high-interest rates, providing a safety net for suppliers.
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Use trade credit insurance to make securing financing easier, especially for growth-oriented companies.
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Address capacity issues and maintain coverage with top-up solutions offered by insurers.
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Enhance supply chains and improve terms for suppliers through programs backed by trade credit insurance.
By adopting these strategies, businesses in the food and drink industry can better navigate current challenges, drive growth and gain a competitive edge.
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