You can hardly have missed the major companies failing left, right and centre in recent months. Carillion, Palmer and Harvey, Maplin, Toys R Us — the list goes on. House of Fraser is in serious trouble, and that may well have gone further by the time you’re reading this.
The problem goes all the way through business, from giants to SMEs. Corporate failures rose by 2.5% last year, and with two or three years of slow growth forecast, in addition to whatever effects Brexit might have, this figure is likely to get worse.
With that in mind, it’s a good idea to look at insuring your company against bad debt. There are three main approaches to this.
Bad Debt Insurance from Your Bank
If you already have an invoice finance facility with your bank, and the easiest option is to use them for bad debt insurance. However this isn’t necessarily the best approach.
For one thing, you’ve probably selected your bank for its lending facilities, which doesn’t necessarily mean its bad debt insurance is equally strong. In fact, it’s likely to be more expensive than from other providers, and will probably not cover a company’s work in progress, pre-credit risk or offer binding contract cover. Most will also not insure construction contracts.
You’ll essentially be buying an off-the-peg policy from your bank. This may meet your needs, but you can’t be sure of that.
Approach Insurers Directly
There’s nothing to stop you dealing directly with a company that specialises in bad debt insurance. However, there are several problems, quite apart from the usual pitfalls of DIY insurance.
Although the insurer’s policy won’t be quite as off-the-peg as the bank’s, companies typically offer only a small range of policies, and there’s no guarantee that any of these will be ideal. It also leaves the insurer free to keep their prices high, since there’s no pressure of competition.
Use an Insurance Broker
Using a broker is generally the way to find the best insurance policy, but it’s important to find one that specialise in bad debt insurance. A specialist broker will be able to compare a broad range of policies and find the one that suits you best. The insurers know that and will be eager to offer competitive prices.
A specialist broker can find a policy which covers all the elements not included in a bank’s policy. Most importantly, being subject to FCA regulation, they’re obliged to act in your interest.
Bad debt insurance is an essential stop-gap that can make a difference between your business surviving or failing, but it’s no substitute for getting your invoices paid. Give me a call if you need help with that.