Customisable solutions in trade credit insurance can greatly aid companies in managing their credit and counterparty exposure while also supporting growth in new markets or with existing clients. Many companies are also entering new markets and extending their supply chains across multiple regions, all of which further increases the need to protect themselves from risks involving commercial trade debts.
What is trade credit insurance?
Trade credit insurance indemnifies a seller against losses from non-payment of trade debt arising from slow pay, insolvency and political risk in case of cross border transactions. Coverage is designed to prevent disruptive losses, reduce risk of key account concentration levels and provide risk transfer of bad debt issues.
A recent industry panel debate hosted by Aon South Africa drew leading trade credit insurance experts together to unpack the key trends facing businesses of all sizes in a global economy that is facing unprecedented economic, political and social upheaval.
The following are some of the key issues unpacked by the panel experts:
“Accounts receivable are often the largest uninsured asset on a company’s balance sheet, even though they are also the primary source of revenue. The global economic outlook coupled with local pressures and fluctuating markets are putting accounts receivable at risk and constraining cash flows. It would also be foolhardy to believe that large businesses don’t default on payments as recent corporate failures have shown” – Maria Teixeira, Trade Credit Business Unit Manager at Aon South Africa.
“We see high rates of payment default to be the new normal and we expect our policyholders to practice due care and implement risk management strategies to mitigate risk” – Charles Nortje, CGIC.
“Business is adjusting and focusing more on gathering information, talking about financial situations with buyers and being risk cautious” – Jacqui Jooste, Coface.
“There are still good risks to be found, despite the situation. Business owners understand their business much better than we ever will, it’s all about being on the same team and talking about the turbulent water” – Gareth Joubert, Hollard.
“The need for co-insurance models where the risk is shared is steadily growing against a tough economic backdrop” – Menso Kwint, Lombards.
Trading in Africa
“Africa offers an avenue of investment, with many multinationals investing in many African countries. But in the face of economic, political and regulatory uncertainty across the continent, it can be very difficult to recoup losses in unfamiliar territories. A professional trade credit insurer is able to assist clients in vetting potential clients or buyers in cross-border transactions, set credit limits and provide debt collection services if needed, significantly mitigating potential risks on foreign soil” – Maria Teixeira, Aon South Africa.
“To grant trade credit insurance in Africa, you need an expert on the ground that thoroughly understands the local risks, language, economy and cultural nuances. It’s crucial to develop those relationships” – Donna Furmidge, Santam.
“Gathering information on African buyers is futile. It is vital for trade credit insurers to visit the country, assess the market position and confirm what they have to lose if they don’t pay their debt” – Charles Nortje, CGIC.
“Obtaining quality information on an African country is complicated as it is a melting pot of diverse legislation and political issues. The support of clients can greatly aid in making these efforts meaningful, though it remains a time-consuming undertaking” – Stephane Rutili, Euler Hermes.
The use of trade credit insurance as a finance facility
“The use of trade credit insurance as a means to secure a finance facility is steadily growing from a global perspective. Up to 60% of our new enquiries into trade credit insurance come from financing enquiries directly or indirectly linked, where clients want to achieve access to more competitive lending rates. In certain instances, banks are insisting on credit insurance before lending” – Maria Teixeira, Aon South Africa.
“A trade credit insurance policy provides clients with the ability to trade on a more secure basis. It also illustrates that they have good business and credit management principles in place, which makes the business a more attractive prospect when it comes to securing credit and loan facilities” – Jacqui Jooste, Coface.
“This type of approach is quite new to South Africa, but growing traction” – Stephane Rutili, Euler Hermes.
“This approach is a valuable instrument in the hands of an SME. The root cause for failure of an SME is a lack of business acumen and capital, with risk mitigation through trade credit insurance being a valuable solution” – Charles Nortje, CGIC.
Securing the market for start-ups and SMEs
“There’s a misconception that trade credit insurance is only suited to large corporate companies and that it is expensive. The reality is that even small businesses can insure from as little as R4 000 and upwards Small and medium businesses are certainly at greater risk if a major debtor defaults as their balance sheets usually cannot carry them through a major default” – Maria Teixeira, Aon South Africa.
“There is a lot of growth and demand in this market, though it remains difficult to underwrite the SME market from a risk perspective as governance protocols are often not as strict as they need to be. It’s often best to start with a small credit facility and build it over time” – Jacqui Jooste, Coface.
“In the SME market, it’s not so much about the actual business but the people they deal with. If you take a small basket of SMEs whose interests are aligned, you will find they are very careful who they deal with and treasure their key clients” – Charles Nortje, CGIC.
The value of trade credit
“With trade credit insurance in place, companies can enhance their bank financing by improving their lending relationship, improve their balance sheet by insuring their debtors and gain access to more capital at reduced rates. Trade credit solutions can also support sales in new or riskier markets, grow existing accounts, and strengthen customer relationships by helping buyers with letter-of-credit requirements gain credit terms. Trade credit across borders can cover political risks such as currency inconvertibility, importation risk, conflict and repudiation risk” – Maria Teixeira, Aon South Africa.
“As a trade credit insurer, you are on the ground investigating risks to gather first-hand information. It forms the basis of solid risk management disciplines and provides us with the means to make an informed decision on whether a risk is worth taking” – Donna Furmidge, Santam.
South Africa is currently experiencing difficult political and economic conditions, which has a direct impact on the financial and trading performance of businesses. Vulnerabilities to external shocks have also increased, with the impact of this slowly manifesting in financing becoming more difficult to secure and dwindling foreign direct investment.
“It paints a picture of a distressed economy where the occurrence of defaulting debtors on a company’s books is increasing in response to the weak trading conditions. Regardless of whether a business operates locally or across borders, and whether it is a large or small business, trade credit cover is essential to manage and mitigate the credit risks associated with customer debtor debt. The failure of a major customer or even several smaller customers to pay their dues can severely impact the financial health of a business,” says Teixeira.
In the current environment where credit facilities are increasingly in demand, credit insurance becomes a necessity. Payment protection through properly scoped credit insurance is a non-negotiable given the current market volatility and threats to business sustainability.