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Credit insurance helps companies to protect their current and future cash flow
and net profit, according to major pan-European research carried out for Euler
Hermes by the Credit Management Research Centre (CMRC) at the University of
Leeds.
The reseach reveals that:
► 1.38% of a company’s annual turnover could be saved by the existence of a credit
insurance policy.
► Credit insured firms receive more favourable credit periods, on average up to
seven days longer.
► Raising finance through loans is also more likely to be cheaper for credit
insured firms with an average interest rate of 3.5% for insured firms versus
3.95% for non-insured companies
► 49% of credit insured companies manage to obtain a bank loan compared to 34% of
non-insured businesses
► The average interest rate obtained by insured firms is almost 0.5% lower than
for non insured
► Credit insured firms are more customer focused than non insured
► Trade debtors represent up to 35% of companies’ total asset.
► One third of all businesses see late payment as an ongoing concern
► 69% of the companies claim that they would withhold supplies from a slow paying
account
► 90% of companies handle their credit management activities internally
► 80% of the surveyed firms outsource the debt collection
► Poor management is behind most of corporate insolvencies
Clemens von Weichs, CEO of Euler Hermes, commented: "One of the key findings of
the study is that credit insurance enhances companies’ business relationships
which contribute to the overall effectiveness of the credit management
department.
Professor Nick Wilson, director of CMRC added: “A significant financial impact
is generated through higher levels of repeat business, lower levels of customer
queries and disputes, more profitable sales, DSO flexibility and on-time
payments, lower levels of bad debt and incidences of fraud and lower overall
average costs of credit management.
Credit insured firms also have access to lower cost and better quality credit
information and market intelligence.
This saves money on credit reference information and market research”.
The study of more than 2,000 businesses in 10 European economies shows overall
that in terms of credit operating costs as a percentage of sales volume, on
average 1.38% of a company’s annual turnover could be saved by the existence of
a credit insurance policy.
This means that for a company with a turnover of 10 million euros this would
represent a saving of 138,000 euros.
By having a policy in place, similar findings can also be seen in terms of bad
debt write-off as a percentage of sales, average credit salaries, average spend
on credit information and levels of fraud.
In addition, raising finance through loans is also more likely to be cheaper for
credit insured firms with an average interest rate of 3.5% for insured firms
versus 3.95% for non-insured companies.
Credit insured firms also enjoyed improved supplier, bank and customer
relationships.
Although a company may not inform the supplier whether or not they have a policy
in place, the systems and procedures that arise from having a policy will mean
that a credit insured company is a better risk from the point of view of the
supplier.
The study also shows that credit insured firms receive more favourable credit
periods, on average up to seven days longer.
The preferential terms gained from suppliers, the ability to take extended trade
credit, the transaction discounts that are achieved and the smaller and more
stable supplier base that is evident all contribute to the operational stability
of the business.
Credit insured firms generally have better banking relationships as a result of
securing trade debts by credit insurance.
This manifests itself in terms of longer and more stable banking relationships
(banking relationships of credit insured are five years longer than
non-insured).
They also get better access to short-term finance and loan capital and a lower
average cost of bank capital. In all, 49% of credit insured companies manage to
obtain a bank loan compared to 34% of non insured businesses.
In addition, the average interest rate obtained by insured firms is almost 0.5%
lower than for non insured.
The research has also shown that credit insured firms are more customer focused
than non insured.
As many as 84% of credit insured firms view customer relationship management as
important or very important (vs 79% for non insured).
They offer credit to customers and manage credit granting to their customer base
more effectively than non-insured firms.
For instance, 69% of credit insured firms give a credit account to their
customers (as opposed to 51% for non insured) and give credit limits more often to their
clients (77% as opposed to 62%).
Credit insured are also more willing to adapt credit terms
to gain business.
This fosters better customer relationship management for existing customers (73%
of repeat sales as opposed to 67%
for non insured) and is an important element in attracting new domestic and
export customers.
Source:
RedAlert
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