The Covid-19 crisis is evolving into a payment crisis as companies delay supplier payments to protect working capital, increasing risks of defaults and insolvencies. Understanding payment patterns is crucial for companies to avoid bad payers and return to growth.
A survey by Euler Hermes Asia Pacific, conducted between December 2019 and February 2020 with 171 CFOs and Finance Directors, found that 73% of companies faced unpaid receivables and 82% experienced delayed payments over the past three years. Only 25% used Trade Credit Insurance as a risk mitigation tool.
Gaps in trade credit risk protection in Asia Pacific
Trade credit insurance is a vital tool for identifying sales opportunities, ensuring confident business growth, and protecting cash flow. However, only about 5% of APAC businesses use it, compared to higher penetration in mature markets like Western Europe. Mature markets like Australia, Hong Kong, Singapore, and Japan see more trade credit risk management among multinationals and large firms, while emerging markets like Malaysia, Indonesia, Thailand, and China often rely on self-insurance, an inefficient approach that hinders growth. The primary gap in APAC is the lack of awareness among small to medium enterprises (SMEs).
What is Trade Credit Insurance?
Trade credit insurance, also known as Accounts Receivable Insurance, safeguards businesses against customer non-payment of trade debts.
Why is Trade Credit Insurance important?
Trade debts or accounts receivables can constitute 40% or more of business assets. A few defaults can significantly disrupt cash flow. For a business with a 5% profit margin, a $100,000 bad debt requires $2 million in new sales to recover lost profits. Bad debts also weaken financial positions by reducing investment capacity, prompting higher interest rates from banks, and potentially lowering employee morale due to job security concerns. These factors highlight the value of trade credit insurance.
Consider trade credit insurance to:
- Grow sales safely through new and existing customers
- Access better financing terms for revenue opportunities
- Maintain cash flow and profitability by mitigating bad debt risks
- Make informed decisions with accessible risk data
- Protect against non-payment and catastrophic losses
- Expand into international markets with export risk insights
- Reduce bad-debt reserves and free up capital
