Trade Credit: A Guide to Credit Insurance
The Balancing Act
A recent look at corporations today would reveal that a significant portion or more of their current assets on their balance sheets are in the form of receivables. That is to say, money owed for goods supplied on credit terms.
A deeper study might even reveal that Accounts Receivables are frequently uninsured. This is happening even though receivables represent the single biggest asset of the company and is mostly at risk.
As the percentage of issued invoices become delinquent, many ultimately end up in unpaid bad debt. Imagine a scenario where a major client or the top 10 customers of Corporate Company XYZ were to suddenly default in debt. This could lead to devastating consequences on the part of Corporate Company XYZ severely affecting their cash flow, earnings, and capital. In worse cases, it could even lead to that company going out of business.
What is Trade Credit?
In simplest terms, Trade Credit insurance is bad debt insurance.
It protects businesses from non-payment of commercial debt. It helps ensure that invoices will be paid and allows companies to reliably manage the commercial and political risks of trade that are beyond their control.
Who is Trade Credit for? Is it for everyone?
Any company that has receivables on its balance sheet that has a potential exposure to loss from the failure of a customer to pay them.
Any company that conducts exports to countries where there is a significant political environment that make it more of a challenge to conduct its business.
Benefits of Trade Credit?
- Asset protection – Settles unpaid debts due to customer failure, or political events that are beyond the business’ control. Preserves cash flow and protects profitability.
- Sales Expansion – Leverage a company’s own credit appetite to increase sales, and confidently sell to new customers and geographic locations and introduce new products.
- Collection services – Efficient and cost-effective collection service, and credit management advisory services.
- Country specific risk services - Access to information about the risk in particular countries. Mitigate political risks associated.
- Financial Intelligence - Gain access to databases of trade credit insurers on financial information about customers. Have the comfort and confidence to grow in new or existing markets by identifying customers in financial distress.
How does a Trade Credit policy work?
Trade Credit makes relationships between the insurer and the insured client quite dynamic. Unlike other insurance policies that gets filed away until renewal – this policy can or may change over the course of the policy period and the credit manager plays a key role in that process.
- The credit manager is responsible in monitoring his insured clients throughout the year to ensure credit worthiness.
- Policy holder or insured may require additional coverage on specific buyers should they arise.
- Information between the insured and his buyers is constantly updated and referenced. When one of the buyers shows signs of experiencing financial difficulty, the insurer notifies all policy holders that sell to that buyer, of the increased risk and establishes a plan of action to mitigate and avoid loss.
- In the event of an unforeseeable loss, the insured policy holder will file a claim with supporting documentation and insurer will pay the claim benefit!
Summarizing Trade Credit:
Trade Credit insurance need not be overwhelming and confusing.
It is meant as a tool to help effectively cover a company’s receivables business and maximize profits in the long run.