Protecting small businesses during times of economic recession | Insurance Business Asia
Small and medium-sized enterprises (SMEs) play an integral role in the global economy. They stimulate employment, productivity and competitiveness in emerging and developed markets, especially when the economy is good. But in times of economic downturn, SMEs are often the first companies to feel the sting. During recession, they tend to be the last companies to get paid, which is challenging considering their already limited cash-flow.
Financing is one of the greatest challenges for SMEs today. According to the World Bank, approximately half of all SMEs around the world lack access to credit. With bank credit lines and loans being the most common and straightforward sources of debt funding for SMEs, this is a bit of a problem. The challenge is that banks, or similar financial lending institutions, often require proof of success and/or collateral before they will support an SME, but not all SMEs can meet those requirements.
However, if SMEs purchase trade credit insurance, they can “enhance their attractiveness to lenders” by securing their collateral, according to James Daly (pictured), CEO of Euler Hermes North America, a global trade credit insurance firm. Trade credit insurance is particularly important in times of economic slowdown, he said. With interest rates and complex trading conditions on the rise globally, debt is becoming more difficult for companies to manage, especially for unprepared SMEs.
“We’ve seen a clear increase in demand for trade credit insurance over the last 12 months,” Daly told Insurance Business. “The important thing is that SMEs start talking to us about trade credit insurance before their country, or a country they do business in, goes into recession. It’s important to get a policy in place when there’s capacity in the market. During times of economic slowdown, that capacity is either going to disappear, or it will be locked down.
“At Euler Hermes, we have what’s called an acceptance ratio. When an organisation comes to us, we’ll look at their accounts receivable, we’ll score them, and then we’ll cover them on a scale of one to 100. When the economy is good, our acceptance ratio is between 80% and 85%, but when the economy goes into recession, that acceptance ratio drops. For example, we look after Brazil from Euler Hermes North America. During Brazil’s two or three years of recession, their acceptance ratios were in the 40% region. Everyone wanted a policy, but we had to deliver capacity to the clients who had been with us for some time.”
A problem with trade credit insurance, according to Daly, is its complexity. It’s not like a homeowners’ policy, or even a small business owners’ policy, which can pretty much be signed, sealed, and thrown in a cabinet until a loss event occurs. Trade credit insurance needs to be managed on a monthly, or sometimes weekly basis, which is understandably challenging for SMEs without access to time or resources to conduct appropriate trade credit risk management.
“That’s why we built a single invoice solution that we’ve rolled out globally,” Daly told Insurance Business. “Through this solution, SMEs can upload all of their accounts receivable on to a platform, which will then give those invoices a risk score. The SME can then select, invoice by invoice, which ones they’d like to insure. They can say: ‘I’ve got this invoice outstanding, or I’m about to issue this invoice for $10,000, but I don’t need a full insurance policy. I only want to insure that single invoice.’ And if that risk is something we know and we’ve dealt with before, automatically and using algorithmic formulas, we’ll immediately give the SME a quote for insuring that invoice.
“It’s a simple way into the product for SMEs, and it provides them with immediate peace of mind on their more challenging accounts. The challenge for the trade credit industry worldwide has always been how to get to the SME. How do we help them and distribute our product? At Euler Hermes, we designed our pathway into the SME marketplace with this single invoice product.”