Late invoice payments continue to be a scourge of Irish businesses. Ireland ranks as one of the worst five countries in Europe for high late payment rates. And it’s a problem that hits SMEs particularly hard, with 67% reporting that they were paid late in 2022.
There are fears the problem could escalate in 2023. While inflation is slowing down, operating costs for many businesses remain high. The Central Bank, meanwhile, recently downgraded its growth forecasts for a second successive quarter, citing slowing domestic demand, high interest rates and capacity constraints.
Businesses feeling the squeeze from high costs and low demand are much more likely to run into cash flow issues, raising the likelihood of missing or delaying payments. That then passes the problem on elsewhere. Suppliers waiting on payments from clients don’t have working capital available to pay their suppliers. And so it goes on.
There are reports that, seeing payment delays going the wrong way, more and more Irish companies are turning to invoice protection to cover themselves. But is this the best option? Here’s what you need to know.
What is invoice protection?
Invoice protection is a form of insurance used to cover commercial payments. It goes by a number of names, including invoice insurance, trade credit insurance and accounts receivable insurance.
It works much like any other form of insurance. Businesses purchase a policy from an insurance provider. The terms of the policy will detail the invoices covered (whether individually, all invoices to a certain client, or all invoices across a business), along with the conditions and terms of payout. The conditions will include defining when a payment is to be considered late, and any exemptions to paying out.
Most invoice protection policies will pay out an agreed percentage of the total invoice value, rather than the full amount.
Is invoice insurance worth it?
Invoice insurance is a useful option if used the right way. Businesses need to bear in mind that they will rarely get a payout of the full value of an unpaid invoice. That makes invoice protection useful for late payments that are eventually paid. But not so much for unpaid invoices.
The biggest problem late payments cause for businesses is disruption to cash flow. This is where invoice insurance does play a valuable role. Instead of being left short, an insurance payout covers you until the overdue invoice is eventually paid. If you impose allowable interest and late payment charges, these can cover some of your insurance costs.
But taking out invoice insurance does add another cost to your business. For some businesses, it may present a cheaper and less risky option than taking on debt to fill gaps left by unpaid invoices. But it’s still an extra cost. And if invoices end up not being paid at all, you’re still out of pocket.
Insurance protection won’t solve all your late payment woes, then. The best forms of protection are good credit control practices. Be careful who you do business with. Demand fair payment terms on all contracts. If you suspect clients are struggling financially and have missed a couple of payment deadlines, ask if there is anything you can do to help. But don’t be afraid to pause contracts if the risks are too great.
And finally, make use of the late payment protocols that are there to help you recover overdue payments. It’s your legal right to get paid for goods and services provided. The law is on your side, and getting paid is always the best solution.