Banks Insist on Credit Insurance for Security

Before some banks provide companies with any type of credit finance, they are stipulating companies have credit insurance cover on their debtors. Banks are all too aware of the detrimental effect late paying debtors are having on companies.

Banks are saying that no longer can debtor payments be guaranteed simply because the customer hasn’t ever defaulted on payment. In the current economic environment, the financial status of a company can change overnight.

Foreign companies moving into new markets are also using credit insurance as a security net if an international trade deal goes bad or to vet the credit worthiness of a potential debtor.

When entering a new market, the risks include the judicial and legal system of that country and how easy it is to pursue bad debts to obtain a creditor-friendly outcome.

In countries such as China, the law does not support easy debt collection, making it difficult for foreign companies trading with Chinese companies to collect outstanding money.

Credit insurance assists in providing details of the debtor’s business environment. Along with current information on emerging-market customers, it can assist in identifying possible late payment or a default before it happens, protecting the supplier from the resulting cash flow fall out.

In managing cash flow, companies should ensure that they know their customers’ financial standing and the pressures within that specific industry. This is important for good debtor management.

There are opportunities in the current market, but they can only be best exploited by organisations that are able to accurately analyse their potential business partners by accessing up to date, quality credit information. Companies with a positive cash flow and who minimise bad debts will be in a better position to trade through the coming economic climate.

Coface, as an international credit insurer, has noted that the continued difficult market conditions are still taking their toll on South African companies. Companies that successfully survived the 2008 economic crisis are now fighting to stay in the race until market conditions improve.

Increasingly cash flow is one of the most important risk elements facing businesses because it provides the ability to compete in weak market conditions. It allows companies to squeeze margins if necessary to gain price competitiveness and the ability to enter new markets.

But cash flow is continually being tested by debtors not paying on time or those who default. In managing cash flow, companies are turning to credit insurance as a way to ensure that overdue debts are covered.