Trade credit insurance has long been considered an ‘optional’ spend by New Zealand businesses, but one specialist brokerage says demand has surged since the country’s first lockdown – a trend almost certainly down to the heightened risk of insolvencies and defaults.
National Credit Insurance Brokers (NCI) specialises exclusively in trade credit insurance, and general manager for NZ Phil Ashby says that businesses now have a much stronger sense of what could go wrong if their debtors find themselves unable to pay. He says having protection against non-payment is becoming increasingly vital, particularly for companies that deal with firms overseas.
“A good example of when credit insurance is needed is when a large company like Mainzeal goes bust,” Ashby explained.
“A good chunk of our customers are the construction supply companies who provide the steel, concrete, wiring, etc., and when Mainzeal went into liquidation, our customers were able to make their claims.
“It can cover everything from construction supplies to export industry goods – dairy, forestry, etc. – that’s all credit insured, so the product has quite a wide reach.”
Ashby says that historically, the product has been met with the relaxed Kiwi attitude of “she’ll be right,” and “we always get paid.” However, he says the benefits of the product extend far beyond financial cover – something businesses often aren’t aware of when considering their purchase.
“It’s become more popular with the exporters who don’t have oversight of the companies they deal with overseas, so having an insurer check them out is an essential tool for them,” Ashby said.
“It’s not just useful in the event that a client goes into insolvency. It also allows the policyholder to get market intelligence, and that data allows you to see how your buyers are performing in the marketplace, which is essential.”
“They can sometimes also use that insurance policy to get more access to funding from banks,” Ashby added.
“In the past, they would look at the debtors’ ledger and lend as little as $0.25 on the dollar on those debtors. If they have a credit insurance policy that covers that debt, the bank will sometimes go as high as 80% and allow the business to increase their capital facility. So it’s very much a tool that you can leverage with your financier as you’re going through that growth phase.”
Ashby says that, ultimately, a business that doesn’t have cover for bad debt will have to make a lot of extra sales to make up for lost cashflow, should the worst happen – and if this can’t be done, it can seriously impact the owner’s livelihood and assets.
“Many businesses put up personal guarantees on their loans,” Ashby said.
“So if something happens, it impacts them, their family and their community. Our job is to insure that risk, to make sure that we can offer a competitive premium, and that the business can ultimately continue to operate.”