It is common in business that clients may sometimes delay in paying what they owe you or even fail to pay up. The question then is, what can a tradie do in a situation where a customer fails to pay. One way to protect your business is to demand payment up front which can work for some clients but then you might end up losing business to other businesses that offer better payment terms. However, another means of protecting your business against bad debts is to get credit insurance. Credit insurance covers your business, so that you still get paid even if they go under or fail to pay you.
Credit Insurance is a preventative insurance policy against bad debts on your trade credit book, also known as your debtor’s book. Credit insurance allows you to insure your business against losses caused by Liquidations, Business Rescue proceedings, and the most common cause, payment defaults.
Credit insurance works by insuring you against your clients failing to pay. Furthermore, credit insurance allows even small businesses to secure finance and working capital from banks, as well as attracting new customers with favourable credit terms.
However, the credit insurance and costs thereof can be unique to your business in that, factors such as the size of your credit portfolio, level of risk associated with your clients and location of your market will be unique to your business.
Credit insurance is a backup for when your business is faced with the risk of losing income. It also comes with several benefits that are valuable to your trade business. Credit insurance can help you to grow your customer base as potential clients may be attracted to more favourable credit terms. Knowing that the impact of bad debt has been significantly minimised, you can increase your business development drive to engage new clients.
New clients bring with them new cash inflows that will allow you to grow your business. A healthy cash-flow enables you to honour your debt obligations thereby building stronger relationships with your suppliers. A client becoming insolvent or not paying will no longer affect your ability to pay your suppliers.
Another benefit of getting a credit insurance policy is that you can receive information about your clients to assist in managing your credit risk. The payment history of potential client is assessed, and credit worthiness will be determined usually by the insurer. Trade Credit is available through insurance brokers or authorised insurance company representatives.
To learn more about how to protect and grow your business, subscribe to our newsletter or look out for new blog updates. At Tradies Accountant, we work with trades-based businesses, providing them with Accounting, Bookkeeping and consulting services. We provide relevant information for your industry, consistent monthly reporting, as well as systemised processes for accurate cash flow projections. Contact us today for a free initial business review.