When an agency makes a placement the last thing on their mind is that the client they are recruiting for may not pay the invoice or go bust in the future. As we live in such turbulent times even the companies who appear to be the largest or most profitable could be hiding a multitude of bad debts, poor credit ratings or even risk of insolvency. Obviously some industries such as health, education and government sectors have a lower risk than industries such as engineering and construction but it is important that the directors assess their client base and make a judgement on what level of protection is required. There are a number of ways to protect yourself from exposing your agency to the potential of not being paid by your clients and one of the most popular is to take out some kind of debt insurance.
There are 2 popular methods of debt insurance:-
- Bad Debt Protection/Credit Protection – This insurance covers your debts should the client go into administration. The protection will be based on the approved credit limit and you will be paid a percentage (normally 90%) of the outstanding amount minus an excess charge.
- Credit Insurance – This insurance not only covers your debts should the client go into administration but also covers your debts should the client refuse to pay or can’t pay your debts after 120 days (often called “Protracted Default”). Again, the protection will be paid up to the credit limit approved and you will be paid a percentage (normally 90%) of the outstanding amount minus an excess charge.
There are a number of places you can get debt insurance:-
- Credit insurance companies – There are a number of credit insurance companies you can use to provide the credit insurance you require. Going direct to a credit insurance company to get a policy can mean you get a very personal service. However, if your turnover is below £4m this can be an expensive way of paying for debtor insurance as the rates are dependent on projected turnover.
- Credit insurance brokers – Using a broker will ensure you are getting the best deal across a range of credit insurance companies and will ensure that all the insurers are providing the same level of insurance and protection. Again, if your turnover is below £4m this can be an expensive option but will ensure you get the correct level of protection
- Invoice Finance providers – Most invoice finance providers will be able to provide some kind of debt protection as part of their offering. Often if this is added to a facility it can bring the overall charges down as the risk to the invoice finance provider is greatly reduced. However, some invoice finance companies will only be able to provide bad debt protection/credit protection and some will be able to provide full credit insurance so it is important to ask what is covered when talking to them. Also, this is a cheaper option for sub-£4m turnover agencies as the fees charged are often lower than having a separate credit insurance policy.
Here are the TBOS top tips to ensuring that your debtor book is covered:-
- Credit checking new potential clients – Completing a credit check on a potential/new client to check their creditworthiness is important to ensure that you know whether a client is worth dealing with and to what level. Using either an online credit report or using the credit checking facility with your credit insurance policy is a good way to assess whether you are opening yourself to the risk of not getting paid.
- Stay on top of your credit control – Stay on top of your credit control and build up a rapport with your clients’ accounts departments to ensure your debts are paid on time and at no point are you left exposed with unpaid invoices for a long period of time.
- Update Credit Limits – If you have a credit insurance policy then ensure this is maintained on a regular basis to ensure you have continuous coverage. Credit limits can drop if they submit poor accounts and you also need to increase limits if you make more placements.
TBOS has many years’ experience of helping recruitment agencies to protect their debtor books. Using TBOS Complete, we advise agencies on their need for credit insurance, we help set this up should it be required and ensure that credit limits are maintained. Using TBOS Freedom, we only fund clients who have a credit limit using our credit insurance policy to ensure that all deals are protected should the client go bust or if the client cannot pay within 120 days. On both models we also have a strict dunning cycle for the credit control process on all of our agencies to ensure that debts are collected within a timely fashion.