How to prevent the domino effect from unpaid invoices

Robert Butler, Credit Insurance Expert, Birmingham

One of the most significant challenges business owners face is dealing with customers who become insolvent and fail to pay their invoices.

In fact, from the last tax year (2022/23):¹

• 55% of businesses still have outstanding invoices.
• 46% of SMEs were left with more unpaid invoices than the previous year.
• 20% of business owners said they had outstanding invoices from four to six months ago.

Outstanding invoices can tie up working capital, making it difficult to meet ongoing operational expenses, invest in growth opportunities, or even pay employees. A single large unpaid invoice can have a domino effect, disrupting your cash flow and leading to financial instability.

Late payments can have significant repercussions:

1. Reduction in overheads.
2. Downsizing office spaces
3. Cutting team social spending budgets
4. Pausing recruitment efforts
5. Freezing pay rises for their employees
6. Making staff redundant.

The additional stress and uncertainty caused by unpaid invoices is a headache for any business owner – especially in the current economic climate. That’s why I’m about to share a secret as to how you can protect your business against these risks by insuring your invoices.

Here’s everything you should know about invoice insurance. 

Invoice insurance explained

What is invoice insurance?

Invoice insurance is also known as account receivable insurance or trade credit insurance. It’s a type of coverage that protects your business against the risk of non-payment from customers due to insolvency.

Single invoice insurance is a relatively new product offered by the trade credit insurance industry. And provides financial protection by reimbursing you for any unpaid invoices.*

What are the benefits of invoice insurance?

By insuring their invoices, you can help minimise the negative impact of customer insolvency on your cash flow and overall financial stability.

1. Protection against insolvency: The primary advantage of invoice insurance is that it shields your business from the financial consequences of customer insolvency. By transferring the risk to the insurance provider, you can maintain a steady cash flow and protect your profitability.
2. Improved credit management: Invoice insurance often involves credit assessment services provided by the insurer. This evaluation helps you identify potential credit risks and make informed decisions when extending credit to customers, minimising the likelihood of non-payment.
3. Enhanced borrowing capacity: Having invoice insurance in place can strengthen your balance sheet, making it more attractive to lenders. The insurance coverage serves as collateral, allowing you to access funding and secure better loan terms.
4. Global market expansion: Invoice insurance can be particularly advantageous if your business is involved in international trade. It mitigates the risks associated with cross-border transactions, allowing you to explore new markets and expand your customer base without worrying about payment defaults.

How to choose the right invoice insurance policy

When selecting an invoice insurance policy, you should consider the following factors:

1. Coverage scope: Assess the extent of coverage provided, including the percentage of invoice value reimbursed and the types of risks covered, such as insolvency or protracted default.
2. Deductibles and limits: Understand the deductibles and coverage limits associated with the policy. Carefully review the terms and conditions to ensure they align with your business requirements.
3. Claims process: Evaluate the insurer's claims process and reputation for prompt and fair settlement of claims. Look for reviews and testimonials from existing policyholders to gauge customer satisfaction.

It’s essential to explore the invoice insurance options available in your market. Consult with reputable insurance brokers who specialise in trade credit insurance to help you determine the most suitable policy for your specific business needs. 

A pillar of sound financial management

Insuring invoices against the risk of insolvent customers is a wise step for you to protect your financial stability and ensure the long-term success of your business. By taking out invoice insurance, you can safeguard your cash flow, improve credit management practices, and expand into new markets confidently.

Safeguarding invoices is not just a risk management strategy but a fundamental pillar of sound financial management. The risks of neglecting invoice insurance are wide and varied, encompassing cash flow crises, bad debts, limited credit access, and stunted business growth.

Don’t leave yourself vulnerable to non-payment scenarios. Reach out to your Marsh Commercial adviser to see how we can help, or feel free to contact me personally at Robert.Butler@marsh.com

 

*As with all insurance policies, terms and conditions apply. Please refer to the policy documentation for exclusions, warranties, subjectivities, excesses and any endorsements.

The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. This article contains third party content and/or links to third party websites. Links to third party websites are provided as a convenience only. Marsh Commercial is not responsible or liable for any third party content or any third party website nor does it imply a recommendation or endorsement of such content, websites or services offered by third parties.