Credit insurance: securing cash flow when customers pay late

Introduction

For many SMEs, extended payment terms and customer defaults are now major sources of cash flow uncertainty. Credit insurance is a customer risk management tool designed to secure cash receipts in the event of prolonged delays or defaults by the debtor. By the end of this reading, you will be able to understand how credit insurance works, assess whether it is suitable for your situation, structure an appropriate management plan for this coverage, and document the trade-offs necessary for informed decision-making.

Context and challenges for SMEs

SMEs that sell goods or services on credit expose their cash flow to the risk of non-payment or late payment by their customers. Credit insurance – also called trade credit insurance – is an insurance policy that protects a portfolio of receivables against the risk of default or significant payment delays. It typically covers receivables arising from sales to other businesses when those businesses become insolvent or fail to pay on time.

Section 1 – What is credit insurance and how does it work?

Definition and conceptual framework

Credit insurance, as defined by insurance law, is a contract by which an insurer agrees to compensate the insured for all or part of the losses resulting from payment defaults by insured customers, in exchange for the payment of a premium. It differs from other forms of credit insurance (such as life insurance linked to a loan) because it focuses exclusively on commercial receivables between businesses.

Operational mechanism

Taking out credit insurance involves:

• the insurer's analysis of your client portfolio to determine the credit limits applicable to each client;

• obligations for continuous monitoring of the financial health of debtors;

• Rigorous documentation of receivables and monitoring of payments to build a claim file if necessary.

The role of creditworthiness assessment

A key element in managing credit insurance is the regular review of customer creditworthiness. The insurer sets limits that define the amounts of receivables that can be insured per customer and can adjust these limits based on changes in financial and economic data.

Section 2 – Credit insurance vs. alternative accounts receivable management methods

Factoring and other solutions

Factoring is often mentioned as an alternative. It involves selling receivables to a specialized company to obtain early payment. Unlike credit insurance, factoring immediately improves cash flow but does not necessarily protect against the risk of non-payment.

Decision-making arbitration

The choice between credit insurance, factoring, or a combination of solutions will depend on your objectives: maximum security of cash receipts, need for immediate liquidity, internal capacity to manage accounts receivable, and the overall cost of coverage. A simple comparative table (without specific figures) can structure this choice based on the following dimensions: protection against non-payment, improved cash flow, management complexity, direct costs, and effects on the banking relationship.

Section 3 – How to assess the relevance for your SME

Key indicators to consider

Before deciding to invest in credit insurance, it is useful to analyze:

• the proportion of your turnover generated on credit;

• average payment times in your sector and your internal trends;

• risk concentration (dependence on a few major clients);

• the potential financial impact of a default on your cash flow and investment plans.

Mini case study: Industrial SME

An industrial SME operates in a sector where average payment terms have increased. Without credit insurance, a major default by a client representing a significant portion of its revenue could cripple its cash flow for several months and jeopardize the financing of its day-to-day operations. With credit insurance, the SME can transfer a substantial part of this risk to the insurer, thereby stabilizing its cash flow forecasts and strengthening its credibility with its banks when negotiating lines of credit. (This scenario is purely theoretical and based on real-world examples.)

Mini case study: Exporting SME

For an exporting SME, the risk of non-payment can extend to political or economic factors specific to certain markets. Appropriate credit insurance helps secure these international receivables and maintain visibility on cash flow, even in the face of legal or regulatory complexities abroad.

Section 4 – Guidelines and checklist for managing coverage

Piloting objective

Effective management of credit insurance relies on documenting all stages, from subscription to monitoring solvency alerts and debt recovery.

Pilot checklist

• Customer inventory and segmentation by risk level.

• Complete documentation of sales contracts and payment terms.

• Monthly monitoring of open credit lines and limits granted by the insurer.

• Formalized process for customer follow-up and transmission of files to the insurer.

• Archiving of proof of delivery and payment request to facilitate claims.

Box – What needs to be documented

• Commercial contracts and credit terms.

• Payment schedules.

• Correspondence with customers who are late.

• Creditworthiness conditions/reports provided by the insurer.

• Claim files submitted to the insurer.

Section 5 – Common Mistakes and How to Avoid Them

Mistake 1: Underestimating reporting obligations

Credit insurance companies often impose strict reporting requirements for late payments and changes in customer profiles. Failure to comply may invalidate a future claim.

Error 2: Ignoring policy exclusions

Certain situations (for example, commercial disputes unrelated to a payment default) may not be covered; it is essential to understand the specific exclusions in your contract.

Mistake 3: Failing to integrate credit insurance into DSO management

Without integrating credit insurance into your key indicators (such as DSO – Days Sales Outstanding), you are not fully utilizing its potential to optimize the management of your accounts receivable.

Section 6 – Questions to ask your insurer/broker (10)

1. What types of risks are covered (insolvency, protracted default, political risks)?

2. How does the insurer assess the creditworthiness of my clients?

3. What credit limits are offered to each customer?

4. What are the time limits and conditions for filing a claim?

5. What specific exclusions are included in the policy?

6. Are there any regular reporting requirements?

7. How is the bonus calculated and what factors influence its evolution?

8. What support is offered in terms of debt recovery?

9. How does this insurance impact our banking relationship or our credit facilities?

10. What scenarios could lead to a revision of credit limits?

Conclusion

Credit insurance is a key tool for managing customer risk and securing cash flow for SMEs. Rather than being a standalone expense, it should be integrated into a comprehensive accounts receivable governance approach that is documented and regularly reviewed. By combining rigorous risk analysis, clear communication with the insurer, and structured monitoring of outstanding balances, business leaders can improve the predictability of their cash flow and focus their energy on growth. The next step is to formally assess your customer risk profile and compare coverage options with your broker to define a suitable strategy.