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How can Trade Credit Insurance safeguard construction against late payments?

Wednesday 21st February
How can Trade Credit Insurance safeguard construction against late payments?

The use and importance of construction trade credits increased during the prolonged financial crisis, where profits and new business opportunities have resulted in poorer cash flow for many. Extending credit to clients is common in construction, where materials and equipment are often purchased before starting work on a new project. Trade Credit Insurance can be a lifeline for construction businesses because it offers protection against losses from late and unpaid trade credit invoices.

What does Construction Trade Credit Insurance cover?

Delayed payments play a critical role in the survival of construction businesses because they can severely deplete cash flow, forcing some into insolvency. Late payments are exacerbated in challenging economic conditions when bank credit is often restricted. These pressures have a detrimental effect on cash flow that isn’t sustainable. Trade Credit Insurance covers unpaid debts and helps businesses manage cash flow more effectively by providing:

  • Real-time business rating information on the financial solvency of current and future clients
  • Protection beyond invoices including pre-manufacture before going to site, work done on site, applications for payment, day work, variations to contract, retention monies
  • Cover for extended payment defaults (late payments)
  • Bad debt recovery arising from customer insolvency
  • Cover for non-payment resulting from political or climate-related events, currency restrictions, interruption of trade or expropriation

How does a Trade Credit Insurance policy work?

A specialist construction insurance broker can guide businesses through arranging Trade Credit Insurance. The broker manages insurance administration and provides all the relevant information to get cover in place. When placing cover, they will assess the following:

  • Company financials and client information provided to the insurer
  • A risk analysis of the project
  • Credit limits and commercial terms
  • Client financial history

Over time, insurers may cover new and existing clients in the policy, providing additional financial security.

Government support to reduce late payments

The Government recently carried out a statutory review of the Reporting on Payment Practices and Performance Regulations 2017. All qualifying businesses must report the total value of unpaid payments in relation to the total volume of payments due. The Regulations recognise the impact of disputes on late payments, including them as late payments in overall payment time data. They also state that standard retention payment terms and retention payment performance statistics must all be reported.

Build UK has compiled contractor and client payment performance data, filed under the Government’s Duty to Report on Payment Practices and Performance. Of the companies included on the list, 49 out of 123 said they paid at least a fifth of their invoices late.

How does Trade Credit Insurance support business growth?

Non-payment is the main reason to purchase trade credit insurance, but many are unaware of the range of other benefits:

Business growth – Trade credit insurance helps protect businesses against the risks of exporting overseas, reducing uncertainty for firms.

Obtaining better finance terms – Banks are more likely to lend more capital to businesses with trade credit insurance simply because it demonstrates an extra level of financial security.

Real-time knowledge of the marketplace – Trade credit insurers provide businesses with live insights into companies, sectors and economic trends to help them grow safely.

Reducing bad debt reserves – Trade credit insurance frees up credit lines with banks, providing greater financial flexibility for reinvestment in growth. Premiums are tax deductible, unlike bad debt reserves, where a business sets aside money if a debt is unrecoverable.

Protecting against non-payment – Trade credit insurance pays debts due to insolvency or protracted default; trade credit insurance will pay out a percentage of the outstanding amount owed (typically around 90%).

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Kerry London is authorised and regulated by the Financial Conduct Authority. The company is a leading UK independent and Lloyd’s accredited broker, which means that we work with a wide range of niche and major insurers.

This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such or regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note, we have relied on information sourced from third parties, and we make no claims as to the completeness or accuracy of the information contained herein. You should not act upon information in this bulletin nor determine not to act without first seeking specific legal and/or specialist advice. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to the fullest extent permitted by law.

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