FEATURE
BUSINESS BANKING
Protecting your business against
bad debt and avoiding the threat of failure
Credit and Business Finance (CBF) is a specialist credit insurance broker and winner of the CICM Credit Insurance Specialist of the Year for both 2017 and 2018. Here, the company’s Managing Director Trevor Price (pictured) explores how a business can protect itself from the effects of bad debts.
This year we have seen several high-profile business failures. Both Carillion and Palmer & Harvey had turnovers in the region of £4.5bn and since Christmas, Toys R Us and Maplin have also failed, while other companies are rumoured to be in difficulties. During 2017, corporate failures rose by 2.5% and pay-outs
from credit insurers hit a nine year high up seven per cent since 2016, paying out the equivalent of £4.3m per week. Economic forecasts suggest two to three years of low growth and interest rates are likely to increase albeit slowly in a response to recent inflationary pressures. With this in mind and with further uncertainty caused by Brexit, you might want to consider how to protect you company against bad debts. There are three ways a company can effectively insure.
Firstly through bad debt protection bought through a bank normally as part of an invoice finance facility and secondly, by directly approaching an insurer and thirdly by using a specialist broker. Perhaps the easiest option for a company looking to
protect itself from bad debts is via its invoice finance facility. However, as is often the case, the easiest option is not necessarily the best. No doubt a company is using a particular bank due to its lending criteria and not because of the strength of its bad debt protection. While a funder’s bad debt protection (BDP) scheme
might work well for a very small business with turnover up to, say, £1m, you are effectively buying an off-the-shelf solution. BDP cannot insure a company’s work in progress, pay when paid contracts, pre-credit risk, offer binding contract cover or normally insure construction contracts - although there are a couple of funders providing the latter.
54 business network November 2018 Buying BDP from a bank is also typically more expensive
than a credit insurance policy as the funder looks to make a margin on the price it pays compared to the price it sells on at. There are occasions when we have saved companies 50% of the cost of protecting themselves against bad debts when switching from BDP to Credit Insurance. The second route to obtaining bad debt protection is to
take a credit insurance policy direct with one of the insurers. This severely limits your choice as the vast majority of insurers will only issue a policy through a broker. Additionally, many people believe that you are likely to pay less if you buy your cover directly from an insurer but the reverse is true. Once insurers are aware that you are comparing their product against the rest of their competitors, market pressure forces the cost down. It is not unusual for us to be appointed to directly
insured cases once a company becomes aware of the more
‘Perhaps the easiest option for a company looking to protect itself from bad debts is via its invoice finance facility’
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