Keeping the wolf from the door

There was a time when commercial insurance was clearly the domain of the broker. Times are changing, as more direct products enter the market, leaving the opportunity for brokers to look carefully at how they can add value to clients and create a clear competitive advantage in the market place. One such area is how companies both protect themselves from bad debts and maximise cash for expansion.

Trade credit insurance covers businesses against the risk of bad debt due to the insolvency or protracted default of their buyers. This insurance covers thousands of businesses that trade within the UK and abroad. Trade credit insurance can be an important tool in credit management. It can also provide a replacement of working capital when bad debts and late payments impact on cash flow. Credit insurance helps companies manage credit risks more effectively, especially when they are expanding domestically or exporting.

Most trade credit insurance is tailor-made and the needs of the businesses for which it caters vary widely. However, a standard policy has variations that can be applied to fit many cases. A number of insurance companies underwrite trade credit insurance but many tend to specialise in particular areas. Some companies, for example, concentrate on insolvency and default, usually on a 'whole turnover' basis. Other companies concentrate on 'specific accounts' cover or perhaps just political risk.

Premium costs

The cost of the insurance premium will vary and will be dependent upon the type of cover required. As with any commercial transaction, it is important that businesses shop around to obtain the widest possible cover at the best available price. In this way brokers will always play a vital role with clients in advising and arranging the most applicable cover for them.

But trade credit insurance is only one part of the jigsaw of opportunity for brokers. Lack of cash due to late payment is one of the major contributors to business failure. Even profitable businesses can go under if they cannot collect the cash quickly enough. This is where specialist debt collection, or invoice discounting and factoring can support businesses.

Factors and invoice discounters advance up to 90% of the value of unpaid sales invoices to client companies, with the remaining balance available when customers settle their outstanding invoices. This enables companies to create working capital when they need it, as the amount of finance available is directly linked to sales. As sales grow, so does the finance necessary to sustain that growth.

Factoring services

Factoring services can also include the provision of professional credit management. Collection procedures can be made an integral part of the service. These services can be presented to the client as being provided by the company or by the factor according to circumstances. This can free up management time further and allow businesses to focus on vital growth tasks such as sales and marketing and customer service. In addition, both factoring and credit insurance can provide access to key information on a business' existing and potential clients to indicate how much trade credit can be safely granted without undue risk.

Some brokers may feel that advising their clients on cash-management issues is not their domain but is that of their client's accountant. There is a clear demarcation point between the role of the insurance broker and the accountant here. The role of the broker is to advise on risk-management issues and the role of the accountant is to ensure that the company maintains good financial governance. Advancing trade credit is a risk to be protected against, in just the same way as fire, theft or public liability. It is, therefore, the natural territory for the insurance broker.

Some credit insurers are now offering factoring services for exactly the same reason. They can offer brokers a 'one stop shop' and help brokers bridge any credibility gap that they perceive. In addition, the expertise available through this single-provider solution will greatly help brokers build their knowledge and ensure that clients get best advice for their particular business circumstances.

Above all, advising on issues surrounding trade credit and cash management helps brokers ensure that they are one of the key advisers to their clients.

In extending their services in this way, they are perceived by their clients as not only protecting the companies' future interests by advising on protection against risk, but also aiding the growth of the company. The opportunities for long-term client retention can only be enhanced by making this shift in perception. And there is plenty of training available to help innovative brokers make this change.

While brokers may feel their traditional areas of business have been encroached upon in recent times, opportunities to add value, build revenue and retain clients exist. Trade credit insurance and factoring are a prime example.

- Dominique Vaughan Williams, Marketing director, Coface UK.