Trade credit insurance: Protect your business from construction insolvencies

With a rise in the number of businesses collapsing, construction companies need to be aware of how to protect themselves against risks.

According to UK Government data, construction firms in England and Wales topped the list of industries that experienced the highest number of insolvencies in the 12 months ending 30 September 2023.¹

The number of business insolvencies is on track to be the highest since the financial crisis in 2009.² Trade credit insurance can help your company trade confidently, ensuring you get paid if your customers become insolvent while owing you money.

Trade credit insurance – The benefits

We recommend trade credit insurance for any business dealing on credit terms. It’s particularly useful for construction businesses facing risks driven by the cost-of-living crisis and the high number of customers facing insolvencies.

Trade credit insurance can help protect your company against customers failing to pay invoices for goods or services, usually due to a firm collapsing or lacking cash.

Contact a specialist adviser who can deliver a range of trade credit insurance options to suit your business needs.

The risks hitting the construction sector

As anyone in the industry knows, construction firms are essential for the global economy. However, despite the constant need to create new buildings and renew existing infrastructures, there are many challenges.

You should consider the financial risks, such as rising material and labour costs, supply chain issues, and managing risks related to environment, social and governance criteria (ESG).

High interest rates, higher electricity, gas and fuel costs, inflation, and falling demand for sales have taken a toll on struggling businesses. We’re now seeing construction firms, retailers and manufacturers being hit the hardest by financial distress, and they’re more likely to experience insolvency.³

Understanding the impact of these factors on your business, as well as knowing how to minimise the ever-present risks, is critical to the success and survival of your firm.

Companies are also facing the challenge of paying back what they borrowed during the pandemic. Covid business loans and government support measures (such as furlough) ended at the same time as inflation and interest rates increased, impacting company bottom lines.²

The fact that a firm may not have the money to pay for goods or services is a concern for construction businesses trading on credit terms.

Trade credit insurance protects against non-payments if a customer’s business folds while owing a construction company money.

A policy would create a safety net. This enables a better cash flow and means construction businesses are covered against the increasing risk of being in bad debt.

Firms at risk on the rise

The Insolvency Service said there were 6,208 company insolvencies registered in England and Wales between 1 July 2023, to the end of September 2023. This was 10% higher than the same period in the previous year.¹

In November 2023, 5% of businesses with 10 or more employees experienced global supply chain disruption; with 27% of those businesses reporting a shortage of materials as the main reason for the disruption, according to ONS data. 9% of businesses experienced worker shortages in Mid-December 2023, with 43% reporting they were unable to meet demands as a result.⁴

While many ailing businesses have already been forced into administration, an increasing number of companies are at risk of collapsing under mounting pressures.²

Additionally, more and more firms may go bust or default after months of rising borrowing rates, high inflation and falling demand, industry experts have warned.³

Payment delays getting worse

Late payments of invoices was a significant concern. According to research from the UK’s leading insurance premium finance company, Premium Credit, nearly one in four (24%) SME owners or managers admitted the problem had worsened in the past 12 months.⁵

As well as impacting their cash flow and business operations, including financing their insurance, some found it more challenging to secure credit since the pandemic started.

More than half (55%) of businesses still had outstanding invoices from the previous tax year, another survey revealed in 2023 – making it difficult to meet ongoing operational expenses.⁶

Mitigate the burden

With trade credit insurance, construction businesses can mitigate the burden of late payments to protect against non-payment for services or goods sold and safeguard against the growing insolvency risk.

As more businesses turn to trade credit to mitigate risk and drive growth, identifying the business challenges shaping the construction industry is more important than ever.

Takeaways

Trade credit insurance offers distinct benefits, particularly in the areas of risk mitigation, growth, and enhancing working capital. In summary, for businesses in the construction sector.

Risk Mitigation

• Helps protect businesses against the default of their customers, reducing the risk of non-payment.
• Can enhance credit management by offering insights into the creditworthiness of potential customers.

Growth

• Helps facilitate business expansion by enabling construction companies to safely offer more competitive credit terms to new and existing customers.
• Can increase confidence in exploring new markets or expanding the customer base without fear of significant financial loss.
• Helps secure better financing terms from banks, as insured receivables are often viewed as more secure collateral.

Enhancing working capital

• Helps improve cash flow by protecting against late or non-payment, ensuring more predictable income streams.
• Can lead to improved borrowing terms, as lenders may view businesses with insured receivables as lower risk.
• Allows businesses to release capital as a buffer against bad debts, reallocating resources for growth and operational needs.

Visit our trade credit insurance page for more information on how trade credit insurance can protect your business against these risks.

We will also be holding a trade credit insurance webinar in February, when leading industry experts will discuss the latest insights.