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How trade credit insurance boosts business resilience in MENA

Small non-financial firms in the region are forecast to remain under high liquidity stress in the medium term — putting large shares of their debt at risk of default.

Many companies across the Middle East and North Africa (MENA) have experienced severe financial losses recently due to missed payments from customers. And according to the IMF, the risk of bad debt in the region is likely to loom for some time yet. Small non-financial firms in the region are forecast to remain under high liquidity stress in the medium term — putting large shares of their debt at risk of default.

To help them navigate this challenging landscape, companies can take out trade credit insurance. While these policies primarily protect a company against the risk of non-payment for goods and services, they also provide spinoff benefits that are perhaps less well-known, such as facilitating a company’s expansion into untested markets, improving access to capital, and increasing sales with existing customers.

Key benefits of trade credit insurance

Under a trade credit insurance policy, an insurer covers a company’s non-payment exposure. This will help the company in a number of ways: 

  1. Reduce risk of cash flow issues and insolvency
    In short, under a trade credit policy, an insurer will compensate a company in the instance of the late payment or non-payment of an invoice, up to a pre-agreed limit, helping it avert financial hardship or insolvency.
    These policies are of particular relevance to companies in the Middle East and North Africa, at present. In overpopulated sectors such as mining, construction, and IT, for example, some companies face bad debts after extending credit to customers with weaker credit profiles in order to secure much-needed sales. However, companies across the board and their insurers are reporting issues with late or non-payments.
  2. Explore new markets
    A company that wants to start selling its goods or services to new customers, or in a country where they have no direct presence, usually engages in cash sales where the buyer’s payment obligation is settled straightway. With credit insurance, a company can offer a credit line to a new customer at the outset and, therefore, is, more likely to win their business.
  3. Increase sales volumes with existing customers
    A credit insurance policy covers the sales of a supplier during the 60- to 90-day period a company is typically given to settle an invoice. A company is more likely to place an order with a supplier if a grace period is granted — than if bills are settled in cash — as during this time goods can be sold, cash recovered, and potentially more orders placed with the supplier.
  4. Access funding
    International and local banks are generally more willing to grant facilities to companies that insure their customers’ debt with a well-rated insurer. The insurance is also likely to reduce the cost of facilities, allow for larger sums to be borrowed, and limit the recourse the financial institution will seek to impose on the funds provided.
  5. Improve cash flow
    A company utilising a trade credit policy has to regularly review their customer, collect payments on time, and if required, extend set payment terms or stop shipping to customers who are overdue on their payments. As a result, they shorten their cash collection cycle and ultimately improve their liquidity.

Buying the right cover

Amid slower global economic growth, high energy prices, inflation, and higher interest rates, companies in the Middle East and North Africa are increasingly at risk of delayed payment or non-payment by customers based either in the region or in the UK, Europe, US, and Latin America where late payments have spiraled out of control in some sectors. In the UK for instance, 52% of small businesses experienced late payments in 2022.   

In order to protect themselves against bad debts, information is key. Companies should lean on their insurers and relevant information providers such as trade associations and professional bodies to perform due diligence on partners ahead of providing them with goods and services. Some insurers, for example, run risk workshops, where they give an assessment of the performance of their clients’ partners. Companies should also follow closely shifts in risks in the countries and sectors where they do business. 

Companies should consult a broker to make sure they have the most suitable insurance coverage in place and are taking all measures available to mitigate their trade credit risks.

For more information on trade credit insurance, please contact your Marsh adviser.