Making a sale doesn't guarantee that you're going to be paid. Goods can be damaged, stolen or lost before they reach the customer. A customer might refuse to pay or become insolvent
Goods in transit insurance and trade credit insurance provide cover against these risks.
Goods in transit insurance
If you use your own vehicles to make deliveries, you need to be sure that your vehicle insurance covers this. Many business insurance policies don't. If so, not only will your goods not be insured, but the insurance policy could be invalidated altogether. To protect yourself, you need to buy full commercial cover.
If you use a courier or haulage company to handle deliveries for you, you should check what your contract with them says about liability for any problems, and what insurance cover they have. A reputable delivery company should have specialist goods in transit insurance and be prepared to let you know what is and isn't covered.
If you're importing or exporting goods, you should make sure that contracts clearly spell out who is responsible for insuring goods at every stage of the journey. You can arrange insurance yourself or use a freight forwarder with suitable cover.
In every case, you should check cover details and exclusions carefully. You'll want to be sure that the policy provides enough cover and that you wouldn't have to contribute too high an 'excess' towards any claim. Watch out for limits to the value of each individual item, or per kilo. Particular types of goods may also be excluded, such as mobile phones and tablets that are more likely to be stolen.
Trade credit insurance
Trade credit insurance can cover you if a customer doesn't pay you because of insolvency. In some cases, the insurance also covers customers who fail to pay for a significant length of time after the agreed credit term. According to the Association of British Insurers, trade credit insurers pay out around £4 million pounds a week in claims.
You can use trade credit insurance for sales within the UK and for exports. But it's only usually suitable for businesses that sell to other businesses, as insurers find it difficult to assess how risky individual customers are.
As well as protecting your cash flow, trade credit insurance can improve your ability to get funding, as lenders know that you have protection against the risk of bad debts.
Most smaller businesses use trade credit insurance to cover all their sales, though you can choose to insure just one big contract or your most important key accounts. Other features of credit insurance can include:
- the insurer checking the creditworthiness of each customer, and setting individual limits on the amount of credit that is insured;
- collection of debts;
- cover for political risk (such as war or currency controls) in international sales.
Trade credit insurance does not provide complete protection. For example, insurers won't generally pay for debts that are in dispute - you need to sort this out with your customer first. And insurers will only pay out part of the amount you are owed:
- A fixed amount may be deducted from the value of each claim you make ('first loss').
- The insurance may only cover claims once your total losses for the year exceed an agreed limit ('aggregate first loss').
- Policies typically pay out a percentage of the claim value, perhaps 80-90%, rather than the full amount.
The cost of credit insurance depends on how risky the insurance company thinks your sales are. Typical premiums are up to 1% of turnover, but can be higher.
Agreeing higher loss limits and lower percentage cover will reduce your insurance premiums. You may also be able to reduce premiums by demonstrating to the insurer that you have an effective credit control system. You may want to take advice from an insurance broker.
