What Is Trade Credit Insurance?
Many businesses operate by offering their goods and services on credit terms. This can result in a significant portion of their working capital being held as accounts receivable, therefore potentially jeopardising the cash flow and profits of the business.
Trade credit insurance protects your business against losses due to the insolvency or default of account customers in both Australia and overseas. Trade credit insurance can provide protection against:
- Insolvency
- Default
- Political risks
Trade credit insurance can be used as a risk management tool to protect your business. For example, your business may suffer a number of ‘smaller’ bad debts from account customers which can usually be managed without causing a considerable amount of harm to your bottom line. The real risk lies in the large and unexpected losses arising from the failure of significant debtors which can be devastating to your business.
Having a Trade credit insurance policy in place will ensure that your business will continue to successfully operate despite the failure of payment from your debtors.
What Are The Benefits of Trade Credit Insurance?
1. Reduces risk of loss
Trade credit insurance provides a safety net against non-payment of invoices by domestic and/or international buyers. One of the largest, as well as the most at-risk of all your assets is your receivables.
2. Improves market penetration/sales growth
Credit insurance allows you to expand your business without any hassles. You can enhance the credit lines with your existing customers or offer more competitive terms of credit to the new buyers (open account terms). It provides a competitive advantage when it comes to exports.
3. Increases access to working capital finance
If your accounts receivables are covered under credit insurance, then export accounts receivable as well as concentrations of credit are included in collateral borrowing base calculations of the lender. This enables you to get cost effective working capital which in turn helps you to not only grow, but also avoid cash flow problems.
4. Helps manage credit risk
The insurer providing credit coverage often acts as a partner and helps to avoid credit losses. They also provide market intelligence which includes better insight into the financial viability of the buyers.
5. Helps to lower bad debt reserve
Trade credit insurance allows you to reduce your business’ bad debt reserve. It also helps to manage write-offs with more certainty. This in turn helps to improve earnings, financial ratios and shareholder equity. Premiums paid for credit insurance coverage are tax deductible.
6. Helps to avoid any unexpected impact on your business
For instance, the unexpected insolvency of one of your major customers could have a significant impact upon your business operations. Having a trade credit insurance policy can assist in identifying early warning signs of potential payment difficulties.
Trade Credit insurance therefore allows you to run your business with confidence and reduced risk. It also supports business expansion as you will be in position to serve more customers due to the competitive credit terms that you can now extend with enhanced working capital, increased borrowing power and better credit management.
For further information about Trade Credit Insurance, please contact us to discuss your requirements.
