What is credit insurance and does your business need it?

Fatima Ayoub
Head of Marketing

Many SMEs regularly have to deal with late and missing payments, which has generated a demand for a range of credit insurance products. In this article we explore what credit insurance is and whether it’s the right choice for your business.

Please note: This article contains information about credit insurance, but not recommendations or advice about any insurance products or solutions.

Reports suggest that over half of Britain’s SMEs are impacted by unpaid invoices and are owed a collective debt of £17.5 billion, meaning each of these businesses are missing just under £20,000 worth of invoices.

Waiting for payments like this can have a huge impact on cash flow, leaving business owners struggling to pay suppliers and staff wages. Some have reported cutting their own salaries and pulling funds from growth projects in order to cover more pressing expenses.

It can get even more serious. According to a report in Accountancy Age, a huge 50,000 businesses go insolvent each year due to late payments.

This risk of non-payments has resulted in a surge in credit insurance products hitting the market. If you are a B2B merchant wondering if insuring your invoices is the right move for your business, read on to learn the answer to questions such as:

  • What is credit insurance?
  • How does credit insurance work?
  • Does your business need credit insurance?
  • What are the alternatives?

What is credit insurance?

Credit insurance is a type of insurance which protects B2B merchants by guaranteeing payment or partial payment of invoices in the event of buyer default or insolvency. Suppliers pay a small fee to their chosen insurer for each invoice they wish to protect and, in return, can focus on running their business without the worry of bad debt.

How does credit insurance work?

Each insurer will present a slightly different offering, but generally you should expect an insurance product that protects at least 90% of your invoices. The cost of each insured invoice will depend on your customer’s risk profile, but will typically range from 0.3% to 2% of the invoice value.

Here’s how it works:

  • Once an invoice is overdue by an agreed period (e.g., 45 days), your insurer begins their collections process.
  • If a collections agency is involved they will take a small fee, which is often charged to the debtor when possible.
  • If the debt cannot be collected within an agreed period (e.g., 60 days) your insurer will pay you the amount covered by your insurance.

Does your business need credit insurance?

As a B2B merchant or marketplace owner, you’ve put a lot of time and effort into maintaining your client relationships, but even if a client has been reliable in the past, the situation can change without much warning.

There might have been a sudden change in the market, they may be unhappy with the items they’ve received, or perhaps they are experiencing payment delays of their own. Your client could even have gone into administration, which is particularly problematic if they represent a large part of your revenue or if you rely on a small number of clients.

Credit insurance can act as an effective protection against these unexpected risks that are out of your control, making sure you get paid for your products or services even if your customers are unable or unwilling to pay.

However, it’s not your only option.

Credit insurance alternatives

Before deciding whether insuring your business’ invoices is the right choice for protecting cash flow, it’s important to be aware of the alternatives to credit insurance.


Allocating cash reserves from your own balance sheet to a self-insurance and bad debt fund can help to minimise the impact of losses in the event of non-payment.

Despite its administrative simplicity, this invoice protection method is far from foolproof. Your business will be subjected to all credit risk exposure and, if a major invoice goes unpaid, self-insurance might not be enough to keep your business afloat.

This method can be risky, time-consuming and expensive.

Letter of credit

A letter of credit is a document from your customer’s bank stipulating a promise to pay the supplier once the order of goods or services has been fulfilled. If the buyer is unable to pay for their purchase, the bank will be required to cough up the full or remaining amount.

With risk transferred to the bank, credit letters provide security against non-payment for both you and your customers. The downside is that the document must be renewed for every transaction, which can be inconvenient and time consuming.

Invoice factoring

Factoring involves a third party who purchases your unpaid invoices at a discounted rate of around 70-85% of the original value. The factoring company takes ownership of the purchased invoices and begins the collection process. Once paid, the rest of the invoice – minus the factoring company’s fees – will be forwarded on to you.

Invoice factoring is a reliable solution for those looking to recover cash quickly while minimising any risk exposure. However, this method is expensive and by nature prevents your business from recovering 100% of its debts.

B2B Buy Now, Pay Later

B2B Buy Now, Pay Later (BNPL) is a relatively new solution which provides a host of benefits to merchants and marketplaces, one of which is a form of invoice protection.

A sophisticated BNPL provider will offer a solution that leverages experience and data to refine their underwriting rules and minimise risk. This means that the vast majority of customers likely to default on their payments aren’t offered credit terms in the first place.

B2B Buy Now, Pay Later providers will also be able to demonstrate backing from a reputable insurer or financier. For example, Hokodo is backed by Lloyd’s of London, so all merchants using our solution can trade knowing they are fully protected against non-payments.

Once the goods have been delivered or the service provided, any decent BNPL provider will pay the seller up front and in full. The responsibility and risk of any missing or late payments falls on their shoulders, not yours, so you can focus on growing your business.

50% of surveyed SMEs believe aged debt has stopped them from growing and investing in their future – don’t let your business be one of them. Book a demo with Hokodo today to find out more about why our B2B Buy Now, Pay Later solution could be what you’re looking for to protect your invoices.

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