Inflation increases financial exposures even when business volumes are not increasing. Rising costs of doing business can also increase the risk of counterparty default and bad debts. The growing proportion of businesses facing financial distress (with the number of global company insolvencies forecast to increase by 21% in 2023) means many businesses will be looking for ways to outsmart the uncertainty inflation stokes around customers paying their invoices.
One way of combatting the impact of inflation is to consider using trade credit insurance. This cover can help on a number of fronts. Trade credit insurance offers protection when your customers default on payments in light of rising costs and interest rates, but can also widen your pool of potential customers, boosting business volumes to support your resilience in the face of continued volatility.
The core application of trade credit insurance is to indemnify losses incurred from non payment. Trade credit insurance could prove a worthwhile investment to protect your accounts receivable if your customers are among those unable to pay their debts in light of rising costs. The cover can prove particularly helpful if your business supplies customers in sectors influenced by discretionary consumer spending levels, which tend to reduce in light of higher cost of living and debt repayments. Suppliers from some leisure and hospitality and wider retail sectors are particularly vulnerable.
Trade credit cover can give you the confidence to increase existing customers’ credit limits and provide credit facilities to new customers, as well as make it more feasible to expand into new sectors and markets.
Trade credit insurers can give you up-to-date insight on payment performance that may be otherwise hard to access. This insight can tell you whether your potential business partner is paying on time, giving you the confidence to go ahead with new customers and markets.
Insurer insight can also work to enhance your existing credit management procedures, helping to protect margins being eroded by inflation.
Trade credit insurers typically set credit limits, which are effectively the amount of protection your business can expect if a customer fails to pay. Trade credit insurers also work to remain up-to-date on your customers’ financial health by monitoring financial statements and often information not in the public domain, such as business plans, projections and management accounts, as well as wider industry data from other companies supplying the same customers.
In this way, your trade credit insurance policy gives your business access to a comprehensive intelligence network. This can act as an early warning system on individual customers facing issues that could make them less likely to pay your invoices, as well as broader sectoral challenges that might give you pause to reconsider extending credit to further customers operating in the same space.
Insuring trade receivables can help you obtain improved terms from funders, which could help your business better weather higher inflation environments. This could be particularly true if your organisation supplies sectors seen by funders as higher risk as they’re impacted by discretionary consumer spending likely to be hit by higher costs of living. This would also be the case for sectors less able to pass on inflationary increases.
Through minimising bad debt provision by having insurance as a mitigant, the business may also be able to direct working capital elsewhere, for example, in developing new products or moves into new markets.
Using risk and analytics modelling to analyse your trade receivables can create actuarial forecasting on the probability of losses. This could reveal risk exposure hotspots by sector or geography, as well as indicate the return on investment when trading-off the cost of your trade credit insurance premiums against potential sales growth and projected losses.
To discover smarter ways to manage business risks in the current inflation and interest rate environment, get in touch.
