One reason small- to medium-sized enterprises overlook something as important as credit insurance is because they have the wrong perspective. They look at their daily operations and think credit insurance is designed to protect them against something that they don’t believe will happen and consider it a step that doesn’t need to be taken. In reality, this is exactly the opposite of how they should be thinking about it. Credit insurance isn’t for what you can predict — it’s to help protect against the unexpected.
The Dangers of Not Having Credit Insurance
We’re living in a world where not only one in every ten invoices are delinquent but also roughly 40% of a company’s assets are tied up in uninsured, unpaid invoices. If the money you were depending on suddenly evaporates, in the best of circumstances, your short-term consequence is a limited cash flow. The long-term consequence could be a negative cash flow that only gets worse as time drags on. Your company could very easily go out of business during that time, or you may be forced to use emergency (read: expensive) last-minute strategies to help bail yourself out like taking out a new line of credit or a loan.
Note that if one of your customers were to declare bankruptcy, it might also impact your cash flow negatively. Another alarming statistic comes by way of the fact that business bankruptcies increased by 8% in 2016 and are projected to increase by a further 5% in 2018. When you add in the fact that approximately 80% of all businesses trade on open terms in the first place, you have a perfect storm of factors that can all easily add up into a much more powerful, potentially devastating whole.
In an effort to combat these challenges, many people turn to various credit management processes. Unfortunately, they don’t solve the underlying problem — your own client still paid late (or not at all) and you still have cash flow problems. They may put a bandage on the problem, but the problem itself is still left to fester — without action.
The Power of Invoice Financing
Invoice financing is rapidly being adopted by many small- to mid-sized businesses as a viable method of credit insurance. Also sometimes called accounts receivables financing, invoice financing allows you to get a fast cash advance by using your existing outstanding invoices as collateral.
The major benefit of this is that the buyer takes on full responsibility for outstanding invoices and other types of bad debt — meaning, they will deal with everything, from late payments to bankruptcy, on your behalf. This not only goes a long way towards limiting your own risk in the event of the unexpected, but it also helps to significantly free up your time. Instead of constantly making phone calls and sending emails asking where your money is, you’re able to focus your attention on the factors that matter — namely, the ones that will help you move your business forward.
This also brings with it the advantage of steadying your cash flow, allowing you access to the funds you need to still make important strategic decisions moving forward.
In the End
Choosing to go without credit insurance is a huge risk, regardless of how you choose to look at it. Remember that when it comes to invoices, you don’t just need your own company to succeed — you need things to go perfectly for every one of your clients too. This is woefully unrealistic, even in perfect economic conditions, as there is far too much out of your control.
Credit insurance, and particularly techniques like invoice financing, helps to alleviate these risks as quickly as possible. For the sake of your business, your employees, and ultimately the organisation you’ve already worked so hard to build, credit insurance ensures your business won’t get caught out in 2018.
