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The secret to mitigating the risk of late payments and optimising working capital in 2023

There can be no doubt that businesses across the UK are facing a challenging period, as economic and political volatility at home and abroad show little sign of settling down.

In fact, business sentiment has worsened slightly over recent months, as sky-high inflation and energy costs along with squeezed margins and falling consumer spending continue to bite. For instance, where our UK Business Risk Report found 36% of business leaders concerned about financial uncertainty last year, 2023 finds almost three quarters fearing for the future – and 10% worried that their firms may not survive the year.1

Those concerns are, to an extent, well-founded. Most experts agree that the business environment will remain challenging this year,2 while business insolvencies are on the rise having last year reached levels not seen since the financial crisis in 2009.3

The rush for resilience

It's not all doom and gloom, however. Despite these concerns, many business leaders still view 2023 as a year of opportunity.

They are seeking to buck the economic trend in a number of ways: By building greater financial resilience into every aspect of their businesses through greater flexibility and efficiency, and targeting sales growth as a means to insulate against falling customer spend and squeezed margins.

The key to that strategy, according to those businesses, is in solid preparation as well as a constant focus on financial data and the bottom line.2 For many, that will mean optimising working capital, to maintain the positive cash flow and liquidity they need not just to meet their near-term commitments, but to invest in growth, diversification and more efficient ways of working.

At an operational level that will almost certainly mean adopting a more proactive credit control stance to minimise late or non-payment of invoices, but it will also require a far greater focus on credit risk in taking on new customers, to ensure sales gains are not undermined by customer bad debt.

Fortunately, there is a secret weapon that all firms offering credit as part of the sales process can use – not just to reduce credit risk and optimise working capital, but also to improve access to the finance they need to invest in growth.

Trade credit insurance: A working capital secret weapon

It underwrites around £350bn of economic activity for more than 600,000 businesses in the UK each year, but trade credit insurance remains a misunderstood insurance product for many.4 That is particularly true of SMEs, just 2% of which currently invest in trade credit cover.5

On the face of it, trade credit is simply designed to protect businesses from non-payment of invoices - replacing between 75-95% of the invoice amount, depending on the type of cover purchased.6

Given that late payment affects more than half of SMEs7, and is the reason for a quarter of all business failures8, that alone may seem an attractive form of protection - but the truth is that trade credit insurance offers a great deal more on top.

In fact, over the last few years, trade credit insurance has evolved significantly, in response to economic change and the needs of businesses. These days it is more sophisticated – offering opportunity as well as protection – and is far more accessible to SMEs.

Using trade credit insurance to optimise working capital

Today, businesses invest in trade credit insurance for many reasons – from protection against credit risk to enhanced access to funding. However, the overarching theme is the use of this cover as a means to optimise working capital without incurring significant operational overheads in areas like credit risk assessment and credit control.

The benefits of trade credit insurance in a volatile economy include:

  • Protection against non-payment: With business failures and insolvency on the rise, the financial risks associated with customer non-payment are clear and present, so cover to mitigate those losses and defend cash flow is a sensible precaution for any business offering credit terms.
  • Strengthened credit control: Trade credit insurance policies commonly include debt collection and legal services, as well as proactive payment monitoring, which can bring greater discipline to credit control, without the need to employ additional specialist staff.
  • Assessing customer risk: Trade credit insurance providers have access to a wealth of data around the credit worthiness of businesses, which can help to identify higher risk customers and set credit limits accordingly.
  • Identifying growth customers: This same credit insight can be used to assess growth opportunities within an existing customer base – to enable a focus on lower-risk organic growth.
  • Winning new business with confidence: Similarly, trade credit insurance providers can also offer credit-worthiness insight around potential new customers, enabling sales teams to focus on opportunities where the risk of future payment default is lowest.

Clearly, all these potential benefits can help to improve and optimise working capital and in turn strengthen business resilience – but the benefits don’t end there.

Trade credit insurance can improve access to finance

Crucially, putting in place trade credit insurance and thereby protecting cash flow, can also help businesses gain access to any finance they may need to invest in growth – at a time when access to debt finance for SMEs is once again becoming problematic.9

That is, by using trade credit insurance to defend accounts receivables and manage credit risk, business can position themselves as lower risk investments for lenders. This is true of many sources of finance - from banks and investors to invoice finance providers, which essentially buy a business’s outstanding invoices at a rate below their face value, and for a fee – to help free up working capital.

Given that a third of SMEs say access to finance is vital to their survival, but 41% say that business finance is less accessible and a fifth of SME loan applications currently fail10, this could be the single most important reason to look closely at trade credit insurance.

Here to help you remain financially resilient this year

Access to trade credit for SMEs has improved significantly in recent years, and a range of flexible cover options like trade credit cover for individual invoices are now available.

To find out more, read about our trade credit insurance solutions – including CoverCredit, which is designed specifically for SMEs, or contact our trade credit insurance specialists for advice.


*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.

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