Invoice Insurance:
An Explainer

• Unpaid invoices are a serious threat to small businesses – 87% of UK SMEs had invoices paid late in 2022.

• Businesses are taking action, with thousands signing up to the Prompt Payment Code, a voluntary code of practice designed to encourage full payment within 60 days.

• To combat the rising risk, small businesses should consider a form of protection, such as invoice insurance.
  

Late payments and unpaid invoices can pose a very real threat to UK SMEs. In the short term, they result in cash flow crunches. Over the long term, they can create an domino effect leading towards insolvency where businesses are forced to borrow money to cover shortfalls, incur legal costs in an attempt to recoup lost money, and see a consistent downturn in profits which may eventually lead to a painful insolvency.

However, there are steps that businesses can take to protect themselves – such as investing in invoice insurance.

What is invoice insurance?

Invoice insurance offers an alternative to legal action or just writing off unpaid invoices. It protects you from unpaid invoices by paying out on the invoices you choose to cover in a selected range of circumstances.

Typically, the first recourse for businesses in the event of a late or non-payment will be time-consuming credit control, followed by legal action. This is not always effective, and when it is, it can lead to a permanent damaging of relationships with potentially important long-term customers who are experiencing financial pressures of their own.

If you choose to take out invoice insurance cover on a specific high value invoice, your insurer will step in to cover the value of that invoice if it’s unpaid due to cash-flow issues on the customer’s side.

However, invoice insurance can also come into effect if a company goes bankrupt, enters administration, or becomes insolvent, providing you with an additional layer of protection and peace of mind.

How does invoice insurance work?

Imagine a situation in which a regular or new customer places an order of a significant value, above and beyond the usual value of your invoices. If paid in full and on time, a large invoice like this will help you grow your business. If it goes unpaid for a long period of time, or entirely, your business will be exposed to greater financial risk.

For businesses in many sectors, such as construction, manufacturing or wholesale, fulfilling orders requires a significant upfront expense in the form of materials, products, or employee and contractor wages. Until the invoice is settled, your business will be operating at a loss.

The flexibility of invoice insurance allows you to choose only to insure these larger-than-usual invoices, and will give you cover for a set period – typically up to 12 months.

With an invoice insurance policy in place on a specific invoice, you’re protected. There’s no need for legal action, and less financial risk to your business.

What is the difference between invoice insurance and trade credit insurance?

While invoice insurance covers specific invoices, there’s a more comprehensive way to protect your business from late and non-payments – trade credit insurance (TCI)

Invoice insurance provides limited protection. It’s a piece of the wider financial puzzle, whereas TCI covers the whole picture, offering:

• Faster business growth
• Extra information for tendering processes
• Reduced costs
• Additional peace of mind

This means that invoice insurance is typically suited to smaller businesses or SMEs who typically make smaller deals and issue invoices of lower value who want to protect a particularly large invoice.

TCI, however, can offer a smoother, safer process for much larger sales and supports your existing credit control processes, protecting your entire accounts receivable.

Insure your invoices with Trade Credit Insurance from Allianz Trade

Every invoice carries a risk that a customer will be unable to pay due to circumstances beyond your control. Protecting your business requires mitigating that risk by understanding who you’re working with and insuring your business against non-payment.

Allianz Trade’s team of specialists is always ready to help you with advice and support to protect your business from the financial impacts of unpaid invoices.

We tailor our policies to your needs to make sure you’re always protected.

Learn more about Trade Credit Insurance from Allianz Trade