If you are in a B2B business like manufacturing, import/export, wholesale distribution, or professional services, your accounts receivables are a major asset. Credit insurance is a unique insurance product that insures your accounts receivables and ensures you get paid even when your customer doesn’t.
In order to win business in today’s competitive environment, businesses are offering more and more generous credit terms giving customers payment options ranging from the standard 30 days to up to 90 days to pay an invoice. This means you could have up to 3 months worth of sales revenue tied up in accounts receivables!
Exercise: take a look at your most recent financial statement to see just how much you have tied up in accounts receivables right now.
Unfortunately, this valuable asset is also one of the most vulnerable to unforeseen losses that are completely outside of your control. Despite the danger, many business owners intuitively understand the need to protect valuable assets like buildings, machinery, and equipment but often forget just how much their business relies on the accounts receivables to make payroll and keep the lights on.
What is Trade Credit Insurance?
Trade credit insurance, or simply credit insurance, is purchased by prudent business owners to protect against the risk that their customers don’t pay within the time frame or on the terms they agreed to. If your customer fails to pay, you simply file a claim with the insurance company and they will pay you instead.
This type of insurance kicks in if your customer fails to meet their payment obligations due to a variety of factors including bankruptcy, political risk, or simply non-payment. You also have flexible options on who/what you want to insure ranging from your whole portfolio to just a specific customer insured for a certain percentage against a specific risk.
Benefits of Offering Credit
Despite the inherent risks, there are a lot of benefits to offering credit to customers. Some examples include:
- Offering generous credit terms can help you win more deals
- Offering credit terms may help encourage larger orders
- Increased customer loyalty
Why Do I Need Trade Credit Insurance?
If you sell products or services on credit terms (ie. deferred payment plans) you are exposing yourself to the risk that the customer does not pay on time which can have a serious impact on your cash flow. Every business owner understands the need to insure their buildings, equipment, and other assets from loss but they underestimate the risk they are taking on by offering credit. Unlike your own buildings and equipment where you can institute loss prevention measures and procedures, you have virtually no control over political risks, the financial stability of your customers, or their willingness to pay.
Trade credit insurance allows you to take advantage of the benefits of offering credit (ie. generating more sales) without taking on the risk of default yourself. This is doubly important if you do business with customers in far off places or when entering new markets where the risk of default is high.
Other benefits of carrying credit insurance include improved cash flow management, improved profitability, and having your accounts receivables guaranteed improves your company’s financial stability and ability to access capital from banks and other lenders.
Trade Credit & COVID-19
In addition to the staggering human toll of this pandemic, the economic toll is equally as eye popping. Every day, we are seeing more and more businesses shut down with no indication that they will open up again. Heading into what looks like a recession with a large part of our economy gutted, things do not look good. That said, every crisis presents (ethical) opportunities for those that are well positioned to take advantage.
With the economic downturn, cash flows are tight and more and more customers are going to be needing more generous credit terms to make ends meet. If you carry trade credit insurance, you can aggressively grow your sales during this period without having to worry about the risk of non-payment creating a win-win situation for both yourself and your customers.
Businesses prepared to play offense during this time will come out ahead at the end of the day. While everyone is falling back and licking their wounds, those in a position to press on will be able to lap their competition. After all, it is easier to be tall when everyone is sitting down.