Any business depends to a large extent on the financial capacity of its clients, who are, after all, the ones who buy and contribute the income. Especially the largest ones, since they account for a considerable percentage of their accounts and are precisely those that do not pay in cash. Therefore, when there is a delay in the collection of invoices or they are not paid directly due to insolvency or temporary inability to pay, the running of the business is compromised or even puts its survival at risk. This risk can be reduced if credit insurance is taken out, a tool that protects companies from non-payment by guaranteeing compensation in the event that a client does not respond to the obligations they had contracted.
A high percentage of business insolvencies is due to the delinquency of their clients, says José Luis Gómez, commercial and marketing of Solunion Spain, an insurance company, which will participate in the webinar Protect your business against possible defaults, organized through Banco Sabadell’s HUB Empresa. This circumstance is notable in deferred or credit payments, in which the product is delivered first or the service is executed and payment is made after a certain period established by both parties.
In Spain, this expert points out, more than 80% of commercial operations between companies are carried out through deferred payments or on credit. And, on average, deferrals (commercial credits) represent more than 40% of the assets —the set of goods, rights and other resources, such as the collection of a debt— of a company. “This shows that any protection against defaults is essential. Especially in times of uncertainty like the current ones”, he emphasizes.
Credit insurance offers, in addition to debt satisfaction, a complete commercial risk management service for the company’s activities. In this way, it is easier to prevent and anticipate risks and invest with greater security and confidence knowing that, in the event of problems, the impact will be less. To do this, they carry out an analysis of clients through their financial data in order to identify the most reliable buyers and maintain a healthy portfolio. Which, in turn, has repercussions on greater solvency before banks and other insurance companies in case of wanting to contract policies or need financing.
How does credit insurance work?
When a company fails to collect an invoice after its due date, it must notify the insurer of the non-payment, whose collection department is responsible for managing the process of recovering the money. In the event that it is not achieved in a conventional manner, recourse is had to the judicial process. If it is finally paid, the insured person recovers the full amount owed, but if he is unable to collect the debt after a certain period, usually six months, he receives compensation for the percentage established in the contract.
Insurance coverage is not the same for all companies. Each one is defined through a study prior to hiring. The insurer, says Gómez, classifies clients and evaluates their solvency. Thus, a coverage limit is defined for the sales that the insured makes with them. This examination is repeated periodically to supervise the evolution of the business and anticipate any risk situation that could lead to non-payment. “At Solunion we analyze thousands of operations every day and constantly update the information on the solvency and payment profile of the clients of the insured”, highlights this expert.
How much can be insured?
The premium paid by each company is calculated from the sales that are guaranteed. When a company requests a credit insurance offer, it must provide information about its commercial activity: sales amount and countries to which it exports, in addition to the data it can provide about its customers. All this documentation is studied by the insurer to assess the fee. “In reality, each policy and its corresponding cost are unique and differ depending on the needs of each company”, points out Gómez.
Jesús Reglero, director of the Master’s in Financial Management at OBS Business School, explains that this type of insurance is particularly useful when it is sold abroad, since it is marketed to clients with whom it has never worked. “It’s a way of anticipating non-payment situations with sales in little-known markets,” he sums up. And they also serve for all types of companies in all sectors. “Any company that uses credit as a management tool and seeks to increase its sales while minimizing risks, as well as having some peace of mind, should tend towards insurance of this nature,” he adds. In fact, says Reglero, many organizations prefer to sell only to customers they can insure, as this allows them to minimize the risk of non-payment. Large companies are the ones that mostly hire these products, but small and medium-sized companies (SMEs) are increasingly turning to them because their activity usually depends on a smaller number of clients.