​Subsidy for Singaporean SMEs: Trade Credit Insurance backs you when customers don’t pay

If you are a Singaporean business getting back on your feet post COVID, you might welcome new orders with excitement, but can you be sure your customers have the resources to pay?

After all, lockdowns in many countries have decimated businesses, and they have struggled with cash flow just like you.

That’s where trade credit insurance comes in. It guarantees you still get paid something, even if your customer doesn’t, or goes bust altogether.

Plus, there is a government subsidy. Enterprise Singapore pays half of the premiums under its Trade Credit Insurance Scheme (TCIS), up to S$100,000 until 31 March 2021.

To qualify, your company needs to be:

• Registered and physically present in Singapore
• At least 30% locally owned
• An SME, which means you can have up to 200 employees and a maximum group revenue of S$100 mln a year

Here are some factors to take into account.

More sales, better credit terms

A small company which insures its trade receivables can consider selling more to existing customers, or pursue new customers who it previously knew little about.

You might consider offering better credit terms if the sale is protected by trade credit insurance. This can help you compete with larger companies which offer larger credit limits and longer payment terms, and allows you to build mutually beneficial relationships with your customers.

More information on your customers

For small companies with limited resources, it can be difficult to find good information on new customers and to figure out appropriate credit terms to offer them, even after a few deals. A company that works with a trade credit insurer also gains a partner, as a credit insurer will provide your company with access to key credit risk analysis on your client, their sector, and political risk. These give valuable insights to help avoid losses.

Better credit insurers such as Euler Hermes invest in the development of proprietary credit and financial information, and also employ risk analysts, as well as industry- and country-based underwriters. Credit insurers will also analyse payment information about its policyholders’ buyers to identify early signs of financial trouble.

Confidence selling overseas

Getting orders from overseas presents you with the dilemma whether to accept the order and venture into a country without knowing anyone there?

Working with a trade credit insurer can help remove some of the uncertainty.

You benefit from the local market knowledge and insights of its partner underwriters.

Credit insurers don’t insure customers they consider too risky. But if they refuse to insure sales to a particular customer you are better equipped to decide whether to take orders from them.

Avoid debt collection services and legal fees

Debt collection is expensive and often ineffective, and legal fees can add up.

At RIABU, our methodology aims to avoid going down this route to begin with.

But sometimes there are unforeseen circumstances and it would be an advantage to have a trade credit insurance policy in place.

Insuring your credit means the insurer is taking on the risks and costs for any potential legal action or debt collection. If a customer fails to pay, your insurer will first try to collect your debt.

The caveat is that insurers will choose not to cover high risk accounts.

Where trade credit insurance won’t help you

Advantages aside, there are some caveats as to what trade credit insurance is not.

For one, it is not a substitute for good credit management. Credit insurance does not replace sound credit practices. The key is having the right information to make informed credit decisions, to communicate with your customers about payment throughout the sales- and delivery process, and therefore avoid or minimise losses.

Trade credit insurance also will not help you with risks related to transportation of your goods. There is a risk in the movement of goods from the seller to the buyer. That would be mitigated through cargo insurance and using a reliable freight forwarder or shipping company. Product damage or loss is also not covered by trade credit insurance.

Currency risk is also not covered – the uncertainty of exchange rates can have an adverse effect on a company’s profit margins. Further complications in the deal – such as payment times, structure of payment, sub-limits – can mean that agreements may sometimes be lengthy. It is important to fully understand the facility that you are taking and the bank or alternative financier that you are working with.

Trade credit is not just for big companies

SMEs generally use tools such as factoring, self-insurance, which is reserving money internally for potential payment defaults, and letters of credit to mitigate risks in trade transactions.

A majority of SMEs engaged in international trade deal on open account terms. They would require greater surety from customers for payment and security when the deal takes place in locations with political uncertainty.

Small business owners might think trade credit insurance is just for big companies, but they can benefit from paying a certain price for peace of mind.

Insurers like Euler Hermes charge about 0.25 cents on each dollar of receivables insured. According to its US website, that means US$20 mln in annual turnover would cost up to US$50,000 to insure.

Factors that insurers take into account include: the volume of insurable turnover, the spread of risk, the destination of sales, the industry sector and the terms of payment.

It is up to you whether you use trade credit insurance or keep cash to cover bad debts.

But paying the trade credit insurance premium might be the better option. It frees up cash, and allows you to sleep easier at night. Especially with the government picking up half the tab.