If a business partner files for insolvency, this can mean a considerable loss of receivables for the craftsman. So that the money is not lost, a credit insurance is recommended. It pays for the loss in the event of the principal's insolvency.
Even if bills aren't paid, credit insurance will stand up for its customer. "Despite declining insolvency numbers, many businesses are not adequately protected against bad debt," says Dr. Peter Ingenlath, chairman of the credit insurance committee at the German Insurance Association (GDV).
An example from the trades
Marco Esser* from Bremen is a central heating and ventilation engineer who took over his parents' business after passing his master craftsman's examination. He does not want to be dependent only on small orders and he goes in search of a large client. He finds him in a property developer specializing in the planning, development and completion of private home estates.
The young entrepreneur is sure he has found the right partner. Everything goes smoothly at first. The team installs heating systems in terraced houses all over the country. He provides other journeymen and apprentices. Since he himself is too involved in the daily assembly business, he gradually loses sight of the financial side of things. He also throws warnings from his tax advisor to the wind. "Your customer hasn't been paying his bills for some time," he hears him complain. "In addition, the bank makes problems because of the current account."
The trip to the district court could have been avoided
It finally comes to a bang. The developer files for bankruptcy. Now good advice is expensive. On a large scale, Marco E. Purchased material and expanded the vehicle fleet. Wages, ancillary costs and input taxes have also maneuvered the company account into deep red. Even the principal bank is no longer prepared to provide further loans. There is insolvency. The company is insolvent. The timely conclusion of a credit insurance could have saved the company from ruin.
What is credit insurance??
This is actually a type of "bad debt insurance". However, the term "credit insurance", which is predominantly used in practice, is derived from the fact that there is a certain period of time between the delivery of a good or the rendering of a service and its payment. The supplying company thus grants the customer a supplier credit for this period. Because the customer can use the product and know-how in the interim period, which can be between 30 and 180 days, without any money having already been paid for it.
One of the main aims of credit insurance is to protect companies from so-called follow-on insolvencies. If a business partner becomes insolvent, this usually means the total loss of the outstanding receivable. Insurance coverage depends entirely on the size and structure of the company's turnover. As a rule, bad debts hit smaller companies much harder than large ones. Even small losses attack the substance. "All the more so if it is a craft business with thin capital cover and dependence on a large client," warns Dr. Peter Ingenlath from GDV.
The credit insurer makes a credit assessment beforehand
The prerequisite for insurance coverage is an assessment of the economic situation of the customers of the company to be insured – known as a credit check. The credit insurer then decides whether and to what extent the supplier credit is to be secured for the customer in question. A deductible for the policyholder keeps the insurance premium at a reasonable level.
Loss prevention, loss minimization and loss compensation
1. Loss prevention
A central function of credit insurance is loss prevention, which credit insurers carry out through credit investigation companies. These companies, usually subsidiaries of the credit insurer, take over the management of the debtors.
They continuously monitor the creditworthiness of their policyholders' customers. If the credit insurer learns of a deterioration in the economic situation of a customer, the customer receives appropriate information in the sense of an early warning system. The credit rating is based on information from the customer's economic environment as well as balance sheets and business reports. In addition, payment experience from other suppliers, trade and bank information, and your own expertise are included to determine the customer's creditworthiness. If the credit insurer learns of a deterioration in the economic situation of its customer, it warns its customer in good time.
2. Loss mitigation
The credit insurer supports its contractual partners in enforcing retention of title after delivery of goods. Through its experience in insolvency support, the credit insurer can actively participate in the preparation and implementation of reorganization concepts in the event of corporate crises of the buyers.
3. Claim reimbursement
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This refers to ensuring the liquidity of an insured supplier. Because: if the company wanted to ensure its liquidity without credit insurance, it would have to make substantial provisions for unsecured receivables.
However, credit insurers do not only step into the breach for their customers in the event of insolvency of the buyer. The insurance companies have expanded the classic insurance cases to include the so-called protracted default. This means: they already take action when the expected payment is outstanding for a long time. Accordingly, the insured event already occurs when the claim of the policyholder has not been paid within a certain period specified in the insurance policy, without requiring objective proof of the customer's inability to pay.
Often, the insurer's entry is linked to the precondition that the policyholder appoints a specific collection agency to collect the debt. If the collection specialists also fail to do so, the insurance company pays.
Credit insurance is advantageous for the rating with the house bank
Another advantage of credit insurance that should not be underestimated, especially for smaller craft enterprises, according to the association, is the expansion of the company's financial leeway vis-A-vis the bank. In a credit assessment by the bank, the evaluation of the del credere risk also plays a major role. When checking the creditworthiness of the company, one could therefore assume so-called "safe" claims. These increase the credit rating and the possibilities for extending credit lines, as the risk of insolvency due to bad debt losses is largely averted.