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An SME’s Q&A guide to Trade Credit Insurance
For almost every small business in Singapore, managing cash flow and accounts receivables has become a highly pressing matter.
Today’s uncertainty and disruption may create undesirable effects on one’s cash flow that shouldn’t be set aside. Small to medium enterprises (SMEs) without business insurance, for instance, may be exposed to the risk of non-payment that arises from client insolvency and other unpredictable outcomes.
The effects have definitely hit home: a 2020 survey by the Association of Chartered Certified Accountants (ACCA) Singapore found that 66% of respondents said their customers have completely stopped or reduced their purchases; 37% reported ongoing cash flow problems due to a collapse in customer demand.
There might be further consequences down the line, including “product launches and investment plans being deferred, further compounded by supply chain challenges and issues with customer order fulfilment,” explained Mr. Reuter Chua, the head of ACCA Singapore.
The present disruption has increased the need for companies to protect their cash flow. Many businesses are asking hard questions at the moment, hoping they can find answers that can alleviate or fix their cash flow issues. If any of these questions sound like you could have asked them yourself, you may want to consider getting Trade Credit Insurance (TCI), or learn more about how this business insurance can help your business.
1. Does your business rely on a small pool of customers – or one very important one?
For any small business in Singapore, relying on a small pool of customers can present a considerable risk to your business. With a smaller customer base, it will take only a few missed payments to jeopardise your cash flow. This is what’s known in the business as “customer concentration risk”; experts suggest that you should avoid having a single customer accounting for 20% or more of your revenue.
Sure, there are upsides to having fewer customers—that’s less people you need to work at building long-term relationships with. But that’s also fewer relationships that need to go wrong to devastate your revenue, cash flow and profits. Lenders are also less likely to extend credit to borrowers with high customer concentration risk.
TCI can help mitigate the risks presented by a smaller customer base. Having this kind of business insurance will give you more leverage to cater to your existing customers, borrow funds, even expand to new markets and new customers with a greater peace of mind.
2. Are late or missing payments common in your industry?
For certain industries, late payments are just part of the cost of doing business. The pandemic has only aggravated this tendency; the first quarter of 2021 saw an “increase in firms experiencing cash flow woes,” explained Singapore Commercial Credit Bureau (SCCB) Chief Executive Officer Audrey Chia, pointing to the adverse effects of COVID-19 restrictions.
Sectors like construction and retail – already known for their collective tendency for late payments – found the frequency of their late invoice payments rise, with more than half of the transactions not paid on time (55.8% and 45.3% respectively).
TCI can protect businesses in these sectors from experiencing the worst of payment-related credit risks. Policy holders can simply claim nonpayment or late payments against their business insurance policy, and TCI can indemnify up to 90% of the insured accounts receivables.
3. Are you looking to expand your business overseas?
Creating an overseas presence for your small business in Singapore offers tantalising rewards – but opens up risks as well. Policy changes can create trade barriers and interrupt your supply chain; foreign exchange fluctuations can negatively affect your cash flow. Either way, doing business overseas presents risks you do not want to ignore.
TCI can protect your overseas expansion efforts, cushioning your cash flow against the adverse effects of policy changes and fluctuations in foreign exchange levels. With this business insurance on your side, you can expand into new markets with favorable terms, and with less fear of consequences.
4. Are you growing your business locally?
Even at the best of times, a small business in Singapore needs to protect its existing position as it’s expanding within the country – whether they’re opening new branches, offering new services, or expanding their customer base.
By having a TCI policy behind them, businesses have more leeway to grow existing accounts and reach out to new customers with less risk.
With TCI-assured receivables, SMEs in Singapore can court new customers that may have been perceived as too risky. TCI can also help businesses compete more effectively, by offering better payment terms to customers, who in turn can buy greater quantities and thus maximising sales.
5. Are you trying to build a better relationship with financial partners?
Lenders have good (and predictable) reasons for extending credit to borrowers. Companies that take added measures of protection on their cash flow, like TCI, are more likely to have their SME financing applications approved. This reassures bankers and shareholders alike about your company’s financial stability, making them more amenable to approving financing for your company’s needs.
Customer concentration risk (refer to question #1) also plays a role: banks will be reluctant to extend credit if you have a high customer concentration risk and no business insurance to cover for it.
TCI can go a long way in assuaging creditors’ concerns. It may even be mandatory in some situations: some banks require borrowers to have TCI on hand before qualifying them for certain asset-based loans.
6. Are you trying to reduce bad debt reserves?
Maintaining bad debt reserves on your books can certainly cushion your company’s bottom line against failed customer payments. However, having larger bad debt reserves on your books can also use up funds that might be better used elsewhere.
TCI can help reduce the need for large bad debt reserves, freeing up capital that would have originally been set aside for situations where your customer fails to pay. With TCI on hand, you’ll have more cash on hand to invest in essential business initiatives. You’ll also be able to claim tax deductions on your credit insurance premiums – something you can’t do with money set aside in bad debt reserves!
Tips on strengthening your cash flow in the New Normal
The end of the “new normal” isn’t anywhere in sight yet. The risks remain, but a small business in Singapore that covers risks with TCI and other business insurance options are more assured of seeing the light at the end of the tunnel.
We’d like to offer a few more tips that can help ensure that the present disruption doesn’t affect your cash flow or jeopardise your business in the long run.
First, manage your accounts receivable concentration risk: try to reduce your dependence on key customers, so that your biggest customer makes up no more than 15% of your total revenue.
Second, sign long-term contracts with your major customers. If it’s more difficult for them to switch vendors suddenly, you’ll be less at risk of scrambling to cover sudden gaps in your receivables.
Finally, sign up for trade credit insurance. Having this kind of business insurance at your disposal will protect your company against the risk of non-payment, and mitigate cash flow problems for your business.
Contact us to learn more about TCI, or to request for a call back.
Important Notice and Disclaimers:
This policy is protected under the Policy Owners' Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Upon approval of your application, coverage for the policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact your insurer or visit the General Insurance Association (GIA) or SDIC websites.
The above is provided for general information only and is not a contract of insurance. Full details of the terms, conditions and exclusions of the relevant insurance are provided in the policy contract and will be sent to you upon acceptance of your application by Euler Hermes ("EH").
UOB does not hold itself out to be an insurer, insurance broker or insurance agent, and nothing herein shall be deemed to create a partnership or agency relationship with Euler Hermes. The insurance products and services stated herein are provided by Euler Hermes. You should consider carefully whether this product is suitable for you before making a commitment to purchase the product.
United Overseas Bank Limited Co. Reg. No. 193500026Z
Euler Hermes Co. Reg. No T13FC0142K
Terms & Conditions:
Please refer to the applicable policy contract for the full details of the terms, conditions and exclusions of this insurance product.
