Trade Credit Insurance for the Construction Industry

11 May

According to the Office for National Statistics, construction output fell by 1.8% in volume terms in October 2021. This is the largest monthly decline since April 2020 when output fell by 41.7%. New work fell (2.8%) from September to October 2021 while repair and maintenance remained unchanged (0.0%).

Pressures from the postponement or delay to contracts as a result of the COVID-19 pandemic has put a strain on the construction sector, making it impossible for some to continue to operate.

In early 2022, it was announced that independent construction and property services company, Midas Group was going into administration with 303 people being made redundant. That said, administrators from Teneo managed to sell part of Midas’ Mi-Space property services to interiors and maintenance specialists, Bell Group, saving 46 jobs.

At this stage, the amount owed by Midas to creditors is unknown. The group’s last set of accounts (year ending 31st October 2020), showed that trade creditors were owed £19.1m. It also showed that there were accruals, which represent expenses incurred but not yet invoiced for, or recorded in, the accounts, of £72.3m.

Furthermore, Twenty 1 Construction, a London-based fit-out specialist with a £68m turnover, went into administration in March 2022.

In this article, Rob Farquharson, Head of Credit & Surety at Thomas Carroll, discusses the importance of Trade Credit Insurance for protection and growth in the construction industry.

What is Trade Credit Insurance?

The risk of debtor insolvency is an inherent part of owning a business. Sometimes your customers simply do not or cannot pay you — it is unavoidable, but not disastrous. Your business can survive such a loss by purchasing a Trade Credit Insurance policy.

Trade Credit Insurance, or Credit Insurance, provides your business with protection against the failure of your customers to pay their debts and substantial delays in receiving their payments. What may seem catastrophic at first is completely bearable with adequate trade credit cover. Learn how to overcome the non-payment of customers’ debts with the following overview of Trade Credit Insurance.

Reining in Customers

Purchasing Trade Credit Insurance can help save your business from crippling bad debt. As globalisation continues to lengthen businesses’ supply chains and expand their customer bases beyond national borders, debtors and creditors continue to grow further apart. This makes it easier to lose track of your customers and presents more obstacles for their payments, such as government restrictions or political instability abroad. Trade Credit Insurance can protect against the various risks of trading across borders.

Not receiving customers’ payments on time, or at all, could be fatal for your business, but Trade Credit Insurance helps transfer that risk. Policies typically cover about 90 per cent of customers’ outstanding debts, so the failure of one large customer or multiple small ones will not overwhelm your organisation.

There are two main types of Trade Credit Insurance:

  • Whole turnover covers the insured’s entire book of debtors, providing the maximum level of protection against bad debt.
  • Specific account applies only to those accounts the insured feels are at risk. These policies may be subject to an increased premium, and are riskier than whole turnover cover since the insured may choose incorrectly and fail to insure an account that defaults.

Common Extensions

In order to be effective, Trade Credit Insurance policies should be tailored to your business and list of debtors. Insurers typically offer extensions to provide a bespoke policy, including:

  • Pre-delivery work in progress, which safeguards against the insured’s financial losses due to a customer becoming insolvent before work is completed, but after the insured has incurred costs, such as material or labour. If a project goes bust, the insured is not left to shoulder the debt and pick up the pieces.
  • Supplier default, which protects against financial losses from a supplier going out of business. This includes the costs associated with finding new suppliers, the loss of advance payments to the defunct supplier and any possible fines or damages for late delivery.

Calculating Premium Costs

Insurers assess your business and determine your premium by considering your business’ risk, the amount of turnover you want to insure, your customer demographic, the overall state of your industry and your success or failure in past credit management. Your premium will likely increase if your customers are concentrated in one or two accounts rather than several. If you prefer a specific account policy, the insurer will investigate the credit worthiness of each individual account when calculating your premium.

Make sure to implement and maintain a stringent credit control policy. Any flexibility or instability in how your business administers and sustains credit will translate to higher premiums.

Depending on which cover you choose, you can arrange a policy for a fixed period of 12 months or for the duration of a specific customer’s contract.

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A clunky, ill-fitting trade credit policy will not benefit your business. Make sure your insurer offers bespoke cover that fits your business’ needs. Trade Credit Insurance is a small, specialised field that requires careful risk assessment. A precise assessment will create an effective insurance policy that keeps you above water when your customers go under.

Contact Rob Farquharson today on 02920 858605 or click here to email for more information on wielding bespoke insurance policies to shield your business from risk.

Rob Farquharson

About the Author: Rob Farquharson

Rob Farquharson heads-up the Trade Credit and Surety division at Thomas Carroll Group, working with businesses of all sizes and from a wide range of sectors to mitigate credit risks.