Debtor Finance is getting more traction in SME businesses. Research confirms that an increasing number of smart operators now recognise just how much competitive advantage this technology-enabled, low-risk financing tool offers. (Explore the competitive advantages of today’s smart Debtor Finance tools HERE.)
Today’s Debtor Finance products come with an add-on option that’s “too good to refuse” – the ability to bundle in SERIOUSLY discounted Debtor Insurance (also called Trade Credit Insurance or Accounts Receivable Insurance).
What does Debtor Insurance cover?
Essentially, you’re buying an insurance policy to cover the risk that customers you have invoiced will default on paying you.
This means that if you have Debtor Insurance and a significant customer goes bust, then you will get 80% of what you’re owed – fast.
If a customer with $50,000 in unpaid bills suddenly goes to the wall then you get $40,000 of what you’re owed immediately. You won’t be waiting and hoping for payment for months – while lawyers, administrators and auditors take their cut.
What does Debtor Insurance cost?
Debtor Insurance has been in the retail market for decades – but it’s been financially out of reach for most SME businesses.
However, Debtor Insurance as an add-on to Debtor Finance is a whole other ball game – because the policy is bought by the finance provider – and THEY get it at super-bulk-wholesale rates.
Debtor Insurance can also be configured to cover just your more risky clients, which further minimises fees.
What sort of rates?
At time of writing (October 2024) I’m seeing rates at around 0.3% of the amount of debtor invoices insured. It’s a tiny amount in the scheme of things.
In today’s economic environment Debtor Insurance is more necessary than ever before
In my view, in 2024 this should be an absolute no-brainer for eligible SME businesses – as the delayed impacts of COVID cash flow disruptions slowly but inexorably “domino” down the supply chain.
Insolvencies are at an all-time high, and CreditorWatch reports indicate that – of the companies going under – up to 60% have no previous defaults.
We’re coming up to Christmas, and the annual January “payment black hole” – the month (or more) when Christmas spending and sales have finished, and everyone takes a break.
This is when some of those SMEs who have been hanging on by their fingernails through rising prices and interest rates – waiting and hoping that “things are going to get better” – will hit a wall they can’t get over.
In this environment, a Debtor Insurance “life jacket” at 0.3% is pretty much a no-brainer. It’s a super small price to pay to protect your business and your livelihood.
Today’s challenges are partly a long term problem, years in the making
COVID has generated a slow-motion tsunami of business-killing challenges – from long shutdowns in hospitality to super-high input prices in construction. It has disrupted supply chains around the world that are still recovering.
We never really got back to “normal” after COVID receded. Almost as soon as business activity increased, interest rates, energy prices and wages immediately began to climb.
So – like a glacially slow-motion tsunami – long-term COVID impacts are still hitting business in waves.
It’s a problem that requires a strategic solution – not just “grit”
To get by, many business owners have been cutting their own salaries, and even putting MORE personal funds INTO their businesses.
It’s laudable – they’re probably doing it to keep their customers served and their people in work – but it may put their business AND their future on the line.
However, if they’re operating in industries with long term, structural Cash Flow Gaps, but without the strategic finance tools to escape the resultant Cash Trap – then “toughing it out” without doing a Working Capital Review could be terminal.
Hope is not protection
Will things get better overall, eventually?
I believe they will – but EVENTUALLY is going to come after be a very long wait. The business that it gets better FOR are going to be the ones that are managing their Working Capital proactively and strategically.
If Debtor Insurance sounds like something that could make your business safer – AND help you sleep better at night – then book a FREE Working Capital Strategy Session today.
