Are your payment terms putting you at risk? Trade credit insurance can help

Trade credit/customer credit is an option available to businesses and their customers that allows them to purchase goods without the need for an upfront payment. Whether it’s through a deferred payment, or a line of credit, customers can agree to a deadline for the full repayment.

Payment plans, however, are a type of credit that a business can offer to its customers that outlines the nature of the repayments and are usually accompanied by a letter of credit. Payment plans are often used to set up regular instalments between the customer and the business and can be interest-bearing.

While credit is the overall financial mechanism that allows a customer to pay later, a payment plan defines how that customer pays, which is usually set in monthly instalments.

When offering payment terms, risk can arise from:

Payment period length: Generally speaking, the longer your payment term is, the more susceptible your business is to non-payment. Longer time frames present more chances for failure on your customer’s behalf which, combined with poor debt chasing, can exacerbate the risks of your payment terms.

Lack of upfront payments: Failing to collect an initial payment for the product or service can be risky. Not only would this put you at an immediate financial deficit, but it can also run the risk of creating a less professional relationship with your customer. If this relationship is abused, a customer could take advantage of your business.

Failing to assess creditworthiness: Regardless of the means of credit being offered, a customer’s credit profile is a paramount consideration to bear in mind. Neglecting to conduct the necessary checks before engaging in such an agreement can leave your business prone to all sorts of complications, ranging from failure to pay to a lack of insurance coverage in the event that something goes wrong.

Missing guarantees: Between the point of an agreement being made, and the resultant goods being delivered to a customer, there are a myriad of things that can go wrong. Shipping delays due to issues outside of the supplier’s control can provide ammunition to customers who are refusing to meet their payment terms. Additionally, sudden changes in exporting due to political pressure, like tariffs or sanctions, can impact a customer’s ability to pay or give them a reason not to.

No penalties: There should always be clear guidance given on payment terms in the event of non-payment. Not only does this set clear boundaries for both parties involved, but it offers you the chance to reclaim part of the debt.  

Business A, a specialised equipment provider to the construction sector, offers all its customers the ability to pay for a high-value item at a later date.

To attract new customers, it begins to offer 60-day payment terms without detailed credit checks for orders below £15,000.

One new customer places an order with Business A for £14,800, which is automatically approved without investigation. The customer takes delivery, but their own project stalls and their cash flow is compromised. After which, the customer silently misses their payment date.

Now, Business A is £14,800 short, cash flow is strained, and it’s forced to delay payment to its own suppliers – staff bonuses are also compromised.

This teaches a painful but valuable lesson. After this, Business A turns to trade credit insurance, which not only protects against future losses but helps vet buyers upfront. Business A’s insurer sets safe credit limits for each client, based on financial data that they couldn’t easily access before.

Now, Business A can continue to offer its flexible payment terms, without exposing itself to the same level of risk as before.

Trade credit insurance can provide peace of mind when extending credit and payment terms to customers. Our team at Allianz Trade takes care of your customer due diligence and background checks, while providing cover in the event of customer default. This gives you more time and resources to focus on safe expansion and growth.

Our global team helps businesses of all sizes, from SMEs to large corporations. To learn more about trade credit insurance from Allianz Trade, contact our expert team.