"The cheque is in the post" or "the person who signs the cheques is on leave" sounds almost comical, but for a small and medium business owner whose company's future hangs on payment arriving, those excuses mean weeks and even months of sleepless nights.

Letters of credit used to give businesses peace of mind, but with the ever-increasing trend by buyers to seek or demand open account terms of payment, this traditional -- albeit expensive -- lifebuoy is gradually disappearing.

"This increases the risks of businesses not getting paid, or having to wait ridiculously long periods to get their money," says Jeremy Hampshire, Managing Director of Trade Line Limited, a specialist credit and political risk broker. "For a company that is hit with a bad debt, they have the immediate pain of lost cash, and possible the longer-lasting pain of having lost part or even all profit for the year."

Trying to recover bad debts can take years, and may result on only part of the payment being collected, he added.

Statistically, many companies suffer from bad debts on a regular basis, even when the global economy is in a period of "normality" and sustained "stability." And it is not just the "high risk" countries that traders need to be wary of.

Hong Kong insolvency numbers have decreased compared to previous years but they are still considered above average. However Hong Kong and Asian companies trade on a worldwide basis and are at risk from overseas insolvency cases through their suppliers. For example, according to Coface Ratings, the United States has ranked considerably higher than the world average on its non-payment index for the past nine years.

Every year, there are an estimated 200,000 cases of insolvency in the USA and Canada. Within Europe, the U.K. has about 25,000 insolvencies, while France and Germany both have about 30,000 each.

"These numbers are frighteningly high," says Mr Hampshire. "So businesses really need to be much smarter in using all the financial tools possible to ensure they get paid as quickly and smoothly as possible."

One of the tools available is trade credit insurance.

What is trade credit insurance?

Open trade is being used more and more widely in Asia following the trend set by Europe and North America some years ago. Trade credit insurance, which European and American firms use to offset this risk, however, has yet to fully catch on here.

"Companies understand the importance of insuring goods in case they are damaged or lost during shipment, but they don't give a second thought to insuring against the possible default and insolvency of their customers," says Mr Hampshire.

Trade credit insurance covers businesses against the risk of bad debt due to the insolvency or protracted default of their buyers. It can also be an important tool in credit management, because it can provide a replacement of working capital when bad debts and late payment impact cashflow. All policies will give advice on recoveries and what to do, with some underwriters actually taking over the recovery process.

Most trade credit insurance is tailor-made because the needs of businesses vary so widely. This means that a standard policy will not fit all cases. This is where a specialist broker can help companies tailor a policy based on their specific needs.

The cost of the insurance premium varies and is on a case by case basis and dependent upon the type of cover required, but is generally always less than the letter of credit that many companies used to have to pay for. Most policies are known as whole turnover, where all the open account buyers are covered under one policy. Some exceptions can be made. The premium will be based on the total amount of debts or receivables in a year, As a very rough guide, the premiums are the equivalent to between 0.5 and 0.15 percent of the total amount of account receivables, but depend on a number of criteria. These include:

• The annual turnover of the business.
• Previous experience of bad debt losses.
  The effectiveness of the credit control system.
• The length of credit given by the business.
• The status of the buyers.
• The trade sector in which the business operates.
• The size of individual accounts and the proportion they represent of the total turnover.

Trade credit insurance can provide a range of benefits for small and medium sized companies. However, they are not necessarily suitable or available for all businesses. There are a number of considerations to be made by both the insurer and the business seeking cover. A specialist broker will be able to help companies find the right insurance products for their needs, enabling them to trade more safely, expand markets and clients databases, and offer better terms of payment to buyers.

One additional bonus of using a specialist broker to secure trade credit insurance is that there are no additional costs on top of the premium charged.