Helping your clients manage trade credit risks

• Trade credit insurance is an increasingly important product to manage credit risk in today’s volatile business world
• QBE’s soon to be fully automated SME trade credit product enables brokers to bind business quickly and easily
• Robust credit management processes can help businesses identify risks quickly and avoid bad debt.

Working on credit terms is a fundamental part of day-to-day life for many businesses across the globe, tying up significant amounts of working capital.

Goods and services are delivered in good faith, invoices are issued, and payment waited for. And usually that invoice is paid.

But if a debtor defaults on payment or becomes insolvent, it can have major repercussions on cash flow and, in some cases, the future viability of the business that is owed the money.

That’s where trade credit insurance comes in. It can protect businesses from the impact of unpaid debts – and can also help identify businesses with a less-than-ideal credit history before a business offers credit terms.

How trade credit insurance can help businesses

Simply put, trade credit insurance can help businesses avoid bad debts. And being able to identify a business as a bad-debt risk in the first place is an invaluable tool in a business’s armoury.

“QBE has held a strong position in the trade credit insurance business for more than 20 years. So, we can draw insights from a range of global sources, including close to one million businesses across multiple sectors including construction, retail, food and manufacturing, to name a few,” says Michael McDowell, New Business Commercial Manager at QBE.

“Thanks to our dealings in the industry, we have access to data that you may not find in the public domain.”

QBE Trade Credit policyholders are therefore supported in their credit management efforts by the team at QBE, who provide credit management tools, early warning systems for bad payers or poor trading risks as well as ancillary services.

The team also works with policyholders to speak directly to their customers, to get further information and knowledge about those risks.

Businesses’ evolving credit risks

Today, businesses are operating in a challenging environment. As well as the trailing – and ongoing – impact of COVID-19, there are supply chain difficulties to contend with, as well as rising interest rates and inflation, and the increased cost of fuel and energy.

“All of this can make it a challenge for businesses,” says McDowell. “As a business, the last thing you’d want is to take on a new client, think everything is fine and you do all of the work, and then they don’t pay you.”

Many businesses were heavily affected by the pandemic, and McDowell says that coming out of COVID-19, companies could open themselves up to risks that may impact their ability to pay.

“Many businesses are going to be looking to grow and increase their turnover to what they might have been achieving pre-pandemic. Others will be looking to pivot and take advantage of a new opportunity in the market. This can impact the amount of credit they may need, so the risk of them defaulting may have increased too.”

Trade credit cover will differ greatly from business to business. For example, some businesses may choose to cover all their turnover, while others may choose to cover specific transactions, or credit issued to specific buyers. And it won’t just give the insured a level of comfort.

Having a trade credit policy in place can also be an advantage when a business is seeking funding from a financial institution – having assets on a debtor’s ledger protected strengthens the balance sheet and could give the lender confidence.

Responding to the ever-changing trade credit landscape

Trade credit insurance is rapidly changing. Over the past two years, QBE has been developing its new SME trade credit product to ensure it meets market needs and can help specialist brokers manage trade credit as easily as possible.

“We’ve worked on making our new SME product fully automated, so trade credit specialist brokers can get pricing and limit coverage themselves for clients who have a turnover between $750,000 and $10 million,” says McDowell.

“Brokers can access pricing through our SME calculator and limits through our portal with a separate log-in. They can then complete the quote and the proposal form to bind the business, which is reviewed by the QBE team.

“The premium quote is almost instant, with only a few parameters – namely, the industry of the insured, the loss history and the estimated turnover.”

Spanning across a multitude of industries, trade credit is a potentially volatile area of insurance. Trade credit insurance is a day-to-day proposition, as a policyholder will acquire new customers, while growing business with existing customers. At this point, they come to QBE for an assessment, and we become an integral part of the business's credit management.

When assessing a policyholder’s risk profile, QBE will factor in the quality of the organisation’s credit management, the area of business they operate in and specific details of the sales transaction.

The most recent release of the platform has built on our goal, to automate all limit decisions to rapidly reduce the need for human decision, with most requests instantly assessed to help speed to market. Upcoming releases will provide a fully automated end-to-end product, and even see the claims process automated, too.

“By developing and evolving this platform for brokers to work with their trade credit clients, we can help make it a far quicker, smoother and easier process,” says McDowell.

Of course, a trade credit policy is the safety net when managing trade credit.

Having a disciplined approach to credit management can help organisations identify poor credit risks before they even start trading and help them put the right processes in place to help minimise risks. This is an area where trade credit brokers can add significant value to their clients’ businesses.

Tips for businesses to manage credit and avoid bad debts

Here are some things you can talk to your clients about regarding their internal credit management – helping them run a better business, and helping you add value to your risk management offer.

A disciplined approach to credit management

Having a systematic and consistent approach to managing trade credit is important for any business, and having a procedure manual in place detailing what to do if payment is not received – and when – will help manage credit risks effectively.

“For example, the manual might state that if payment is not received within 48 hours after the due date, the client will get a phone call; seven days after they’ll get an email,” says McDowell.

“Every business should have a process that details what happens and when, before ultimately putting the client on stop supply and moving to collection action.

“We tend to look at a 90-day window as being a fair time to allow continuity of trade where businesses are not stopping supply too quickly but are managing those risks well.”

McDowell recommends businesses work with a credit risk professional to create a procedure that is right for their organisation, with different levels of management becoming involved at different stages.

“Businesses should review their clients regularly, too,” advises McDowell. “Look at their website, keep an eye on legislative bodies and the news. Pick up the phone, have a chat with them – get as much information as possible.”

As well as helping businesses manage trade credit, of course, this approach could open up new business opportunities.

Approach sales growth with credit management in mind

While a new contract may look good in theory, if the client doesn’t pay, it’s worthless, which is why any sales growth must have a credit management lens applied to it.

“When sales grow, the business takes on more risk,” says McDowell. “Without trade credit insurance, the business might not want to increase work with an existing client or take on a large contract with a client they have never traded with before.”

By having trade credit insurance in place, the business can take a higher risk as they know that contract is underpinned by insurance.

Sales and partner contracts in place

Having a binding agreement in place that details terms and conditions and credit levels is the basis of trade and is imperative for any organisation supplying goods or services on credit terms.

“Make sure clients have as much documentation as possible,” says McDowell. “If businesses get to the legal stage, a lawyer is going to say, ‘Where’s the contract?’. And if it’s just an email with ‘I agree’, it’s not as clear and makes that legal avenue much more difficult.”

PPSR registration

Personal Property Security Registration (PPSR) is a government register that enables people to lodge their interest in goods that a business owns in whole or in part – for example, if one business is supplying goods to another on credit terms.

This is particularly useful and important if, and when a company that has received goods on credit goes into bankruptcy or insolvent administration.

“Unless an interest is lodged, the insolvency administrator owns everything,” explains McDowell. “If a business doesn’t register goods on the PPSR they could potentially lose millions if a company they’re supplying goes into administration.”

As well as standalone items such as cranes or freezers, produce such as grain and mulch, even if it’s been mixed in with something else, can be registered on the PPSR.

In summary

In a volatile world, businesses need as much certainty as possible – and brokers can help them achieve significant control over their credit risk with good processes and procedures – with the reassurance of having the right trade credit insurance partner to fall back on.

To find out more about anything trade credit related, speak to your local QBE relationship manager.