As an entrepreneur, you want to run your business without worries. Timely payment by your (potential) customers and clients is essential to this. But what if your customers do not adhere to the payment agreements or do not pay at all? How do you find out if a prospect is good for his money? And what about manufacturing and contract risks, foreign exchange problems, and political instability? The answer to all these questions is: take out a credit insurance. This eliminates risks and allows you to do business without worries. Below we explain how a credit insurance works, the advantages, and how Xolv can help you.
In short: with credit insurance, you will still receive your money if your customer can no longer pay the outstanding invoices, for example, due to liquidity problems, bankruptcy, or suspension of payments. You protect your company against non-payment, and with that, you prevent payment problems or continuity problems. In addition to payment of unpaid invoices, credit information and collection are also part of a credit insurance policy.
Step 1: Insight
Credit insurance begins with an insight into the financial position of your customer. Every credit insurer, including the credit insurers with whom Xolv cooperates, has a database with current financial data from companies worldwide. With this, you can check the credit ratings of your (intended) customers and debtors online. This is done by analyzing hundreds of economic, political, commercial, and financial indicators.
Step 2: Credit limit
Once the insurer has a clear picture of your customer’s financial position, they will set a credit limit based on your needs before the commencement of the contract. This is the amount for which the credit insurer considers it justifiable to provide the customer in question with a delivery on credit. In addition, it is the amount for which you are covered if this customer fails to pay his invoices.
Step 3: Monitoring
Next, you can start doing business. In doing so, you must always state the general terms of delivery and payment terms and record all agreements in writing. While running your business for this client, the credit insurer covers the risks by continuously monitoring your client’s financial position. If necessary, they will adjust the limit in consultation with you during the contract term.
Step 4: Stop delivery in the event of non-payment
No matter what measures you take, it can always happen that your customer cannot or will not pay after delivery, even if you send a payment reminder and later a demand for payment. In this scenario, we will find out the reason for non-payment. An amicable solution is usually preferable, and we can, of course, help you with this. A first step may be to stop supplying products or services, even if there is an obligation to deliver on your part.
Step 5: Debt Collection measures
If the above actions do not help, collection measures are often necessary. The advantage of credit insurers is that they have their collection agencies worldwide. Therefore, they can – wherever and whenever – put pressure on your customers to pay. Another significant advantage is that credit insurers cover several suppliers for your buyer in question; the insurer has the option to reduce or withdraw at collection, placing extra pressure on the buyer to pay promptly.
Step 6: Payment
If it becomes clear that your customer really cannot pay or, worse, goes bankrupt, the insurer pays out the insured amount.
This way, the continuity of your business is guaranteed.
Taking out credit insurance offers many advantages. Below we list the main benefits.
Credit insurance is too expensive
Credit insurance costs only a fraction of your turnover. Usually, the costs are between 0.1 and 0.5 percent of your turnover. The exact cost depends on your turnover, any previous losses, the number of debtors you have (spread of risk), and the countries in which your debtors are located. In addition, the cost of credit insurance often does not outweigh the losses that may be incurred if you do not have credit insurance.
Credit insurance involves a lot of administrative burdens
That is not true. Obviously, you have to perform some actions, but these improve your credit management and reduce your debtor risks. Experience teaches us that credit insurance fits in perfectly with existing credit control in almost all organizations. Even better: it often proves to be an absolute added value.
Credit insurers cover only good buyers
In the Netherlands, more than 80 percent of all requested limits are issued by credit insurers. These are limits set on excellent to moderately performing companies. Inferior performing companies or companies that do not want to provide information cannot be insured. It is the role of the credit insurer to test how creditworthy a buyer is. Both the credit insurer and Xolv will go to great lengths to establish a limit on your buyer. However, when a credit insurer decides not to cover a buyer, it is wise to ask yourself: should I want to do business with this uncreditworthy buyer?
Credit insurers pull in the umbrella when it rains
This is quite an outdated notion. Based on good information, credit insurers can often maintain cover for companies experiencing difficulties. One of the most striking examples of recent years is the situation surrounding Vroom & Dreesmann (V&D). The day before V&D went bankrupt, credit insurers still provided cover based on collateral and good ongoing disclosure. After the bankruptcy, the credit insurer paid out the claim immediately and could recover the total amount from the shareholders. Not providing financial data to credit insurers when things are going badly may seem logical, but it certainly is not. It is precisely by not providing data that credit insurers will be more likely to reduce or withdraw limits.
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