Besides providing access to credit, insurance is criticalto SME survival
SEE ALSO :Why targeting SMEs makes financial senseBanks and other financial institutions however tend to shun SMEs owing to their risky profile. This is accentuated by lack of an effective risk management strategy. Yet access to finance has been cited as a major factor determining the survival of SMEs. Small businesses need optimal funding to grow and expand. Failure to access financing therefore undermines their long-term viability. Insurance enhances the credit worthiness of SMEs by improving their risk profile. For example, one would hardly expect a bank to lend to a manufacturing firm that has not insured its machines against risks such as fire or theft. Insurance more or less underpins business continuity. No financier would want to put their money in a business that would collapse at the slightest disruption no matter how attractive the returns. For this reason, SME owners should not view insurance merely as an unnecessary expense or luxury but as a business survival strategy. Investing in credit risk profile thus scales up their ability to attract financial support from creditors and even investors. Risk profile We also need to distinguish insurance as a tool to enhance credit risk profile and credit default risk cover. The latter shields lenders from risks associated with non-performing loans. It acts as a credit risk mitigation tool as well as incentive for financial institutions to lend more to small business, traditionally considered riskier compared to government or large corporates. The second aspect of insurance as a business survivaltool is in providing a cushion against natural and man-made risks that could undermine the long-term viability of a firm. Like all businesses, SMEs face myriad risks threatening their survival including floods, drought, theft, accidents and fire. Even non-payment by a customer is a financial risk to a small business.
-The writer is the managing director, Kenya Orient Insurance. Email: [email protected]
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