To protect themselves from the many risks to which they are exposed, companies must take out insurance. These are very varied systems that differ in terms of the sectors, the risks covered, the duration, etc. Credit insurance is one of the most common guarantees in business. What is it really about? Why take out business credit insurance? What risks does the absence of credit insurance expose you to? What does business credit insurance cover? What is the average price of this guarantee? What types of businesses can take out credit insurance?
Credit insurance: what is it?
Payment defaults are very common threats to businesses in all industries. To mitigate these threats, credit insurance is a practical solution. This is a guarantee whose main purpose is to protect your company against the risk of non-payment . Credit insurance is therefore a kind of backup plan allowing you to sell your products and services with complete peace of mind. Indeed, in the event of non-payment by your customers, the insurer reimburses the sums due.
Note that the risk of non-payment varies from company to company and can be due to many reasons. This can be, for example, an obligation to close, the failure of equipment, the bankruptcy of partner companies at various levels, etc. To know the risks to which you are exposed, their nature and their extent, a solvency study is often carried out by credit insurance companies .
This consists of sorting through your customers to identify those who present a high risk of insolvency. Then, the insurer readjusts the amount of cover you want before giving you its agreement. Keep in mind that each insurance company is free to set the limit of cover they wish to grant you.
If you want to take out credit insurance for your business, we recommend that you use an online comparator . This type of tool is indeed a practical and effective solution. This is an online platform that is used to compare several credit insurers at the same time based on the criteria of your choice.
Why take out business credit insurance?
There are many reasons why taking out creditor insurance is a good idea for you. First of all, it should be noted that business credit insurance consists of several services. We mainly retain:
- compensation for unpaid customers ,
- customer management,
- the prevention and management of disputes ,
We also count all of your company’s business-to-business transactions (more commonly known as B-to-B transactions). In the case of unpaid debts, the credit insurer is responsible for recovering the amount on its behalf by all legal or diplomatic means. When the collection process is successful, your company can recover up to 100% of the invoice amount from the insurer. On the other hand, when the recovery is unsuccessful, the insurer takes care of compensating you after a waiting period generally ranging from 3 to 6 months depending on the conditions of the contract.
Depending on the insurer, debt collection does not jeopardize your relationship with your customers. This allows you to retain your customers. Purchasing credit insurance is also a good idea to cover various business operational risks . These risks relate in particular to recruitment, regulations, management, control within the company, etc. Credit insurance therefore represents support that facilitates the management of your business on many points.
In addition, if you plan to apply for funding requests, taking out credit insurance is an indicator of reliability for your potential sponsors. This insurance also offers you the opportunity to benefit from the expertise of business risk analysis and collection professionals.
What are the risks if you do not have credit insurance?
Business credit insurance is not compulsory. However, its absence exposes your business to various risks. First of all, in the absence of credit insurance, your business is exposed to the risk of non-payment. This situation can lead, depending on the size of the receivables, to a slowdown or a total cessation of your company’s activities.
The absence of credit insurance can also make your company less credible with its customers, suppliers and partners at various levels. In reality, when your company does not have this guarantee, partner companies will be reluctant to join forces with you. Similarly, your customers will not be enthusiastic about using your products and services or supporting you with their loved ones.
Note that since 2015, the law requires companies to indicate on each estimate and invoice, the professional insurance to which they have subscribed to inform the public. Thus, your partners will already be able to see from your invoices or quotes if you have taken out business credit insurance.
What does business credit insurance cover?
In business, credit insurance covers two main types of risk. These are commercial risks and political risks.
Business risks
This is all the risks that your debtors do not pay their invoices for purely commercial reasons. Among the commercial reasons, the declared or presumed insolvency of the activities represents one of the most common. We also note the cancellation of a sales contract, bankruptcy, etc.
Commercial risk coverage is provided by the credit insurance policy. However, for this coverage to be effective, it must represent an annual deductible that actually takes into account the loss you are facing.
Political risks
Credit insurance covering this type of risk is guarantees for non-payment of receivables following external events such as political uncertainties. These can be, for example, wars, revolutions, embargoes, expropriations, coups d’etat, etc.
This type of guarantee also offers, depending on the case, protection for non-payments justified by natural disasters such as hurricanes, earthquakes, tsunamis, etc.
Credit insurance that covers political risks can also take into account national, international or company-specific economic difficulties. This is the case for example:
- currency shortage,
- the historic fall of a currency,
- acts of banditry (bank robbery, etc.),
- fires,
We can also mention the special risks defined according to the realities faced by the partners of your company.
The average price of such a guarantee
The price of credit insurance includes four main components. These are the cover premium, any administrative costs (for contentious cases), investigation costs, and monitoring costs.
The cover premium generally accounts for the largest share of credit insurance. Its amount is based on the turnover and is expressed in “per thousand” of this value. In reality, the more your company has a turnover, the more it is exposed to the risk of non-payment. Note that the value of the cover premium may go up or down during its existence. The insurance company can therefore revise the amount of the cover premium at each due date or when a major claim occurs.
The cost of credit insurance for your company also varies according to the history of your transactions, your sector of activity , the nature of your clientele, your history of loss of receivables. We also take into account the duration of the payment period, the rating of each debtor, the location of the customer, etc. Thus, there is no fixed amount for the business credit insurance premium. Nevertheless, you will find on the market credit insurance contracts available from 1,500 euros.
To determine the exact cost of credit insurance, a questionnaire is frequently administered to each company. This tool provides information, among other things, on the geographical location of the company, its sector of activity, the number of prospects, the number of customers, etc.
It should be remembered that credit insurance does not cover the entire amount of unpaid debts. However, depending on the size of your claim, the insurer and the terms of your contract, you will receive compensation, the amount of which represents on average between 65 and 90% of the total amount of the claims.
Credit insurance: for what type of business?
Credit insurance is not exclusive for one type of business. In other words, all companies, regardless of their size and the sector in which they operate, are eligible for credit insurance. Indeed, whether large, medium or small, companies generally maintain professional commercial relations with several customers and prospects presenting risks of non-payment. The role of insurers therefore comes down to adapting solutions to the individual characteristics of each company to optimize results.
So, even if your company’s activities are limited to national borders or go beyond them, you can take out credit insurance. Note that in the second case, the risks are generally greater. A fluctuation in the exchange rate or a change, even minimal, of the political situation of the territories in which the company’s exports extend represent potential risks of non-payment. To do this, you must look for an infallible insurance that fully covers the risks involved.
Thus, credit insurance is a very important device for companies. It actually allows them to be protected against all sorts of risks, common or not, in business. It is also a real asset for improving the image of the company with customers, prospects, suppliers, etc.