Accounts Receivable

Industry: Trade Credit Insurance Brokerage

Is there an insurance product which ensures that businesses extending credit get paid? Yes!

Trade Credit Insurance

Trade Credit Insurance, also known as business credit insurance or export credit insurance, is an insurance policy that protects accounts receivable while also offering significant ancillary benefits. The protection provided by a policy equips businesses with the confidence necessary to extend credit to their business customers, enter new markets and increase sales to existing customers. With a Trade Credit Insurance policy in force, a company can safely offer open account credit terms.

How Credit Insurance Works

• Policyholders request coverage on their buyers (customers). The insurance carrier will perform an analysis of the creditworthiness and financial stability of the buyer.
• The credit limits requested will be approved, partially approved or refused. Each buyer is assigned a credit limit by the carrier, which is the maximum indemnification if that buyer fails to pay you.
• Business continues as usual. Purchase orders are fulfilled, shipments are released, and invoices are issued with the non-payment risk mitigated up to the approved buyer limit.
• Portfolio monitoring. The carrier will continuously monitor the insured buyers (i.e., evidence of slow pay to other suppliers, reduced spending, etc.) and alert the policyholder to potential changes in the creditworthiness of their buyers.
• Vetting prospects. The creditworthiness of potential new customers can be ascertained prior to the sale.
• Making a claim. Should an insured buyer fail to pay, the policy is triggered and the policyholder is paid by the carrier according to the terms of the policy.

The Benefits of Trade Credit Insurance

• Loss Protection – Ultimately, bad debt is eliminated and cash flow is preserved as a result of claim payments.  Subrogation efforts are led by the carrier.
• Peace of Mind – All credit risk is transferred to the carrier, so your executives can focus on building the business.
• Increased Competitiveness – Your competitive edge is maintained when you are able to offer open account terms to a marginal customer when your competitors won’t take the risk.
• Funding Facilitated – An insured Accounts Receivable (AR) is valuable collateral for asset-based loans. Without the insurance, you will be charged a higher interest rate and offered a smaller loan or revolving credit line.
• Customer Insights – Access to the carrier’s business intelligence can facilitate sales contract negotiations with both current customers and prospects.
• Cost Effective – The annual cost of the policy is typically less than half the price of a letter of credit and requires much less administration. Also, other business expenses are eliminated such as the cost of credit reports, the need to hire a credit analyst and the performance of other credit and collection tasks, which are instead handled by the credit insurer.

Increased competition is benefiting policyholders. In the past, mono-line carriers strictly offered whole turnover coverage but increased competition from international carriers entering the Trade Credit Insurance market have forced carriers to be more creative and flexible.

For example, carriers now offer key account policies, allowing companies to choose to segment their insured accounts.  In addition, coverage can be purchased to protect only your largest accounts. Or, if your large accounts are considered low risk, they can be excluded from coverage in favor of insuring only your small accounts. A savvy trade credit insurance broker can suggest many strategies for carving out a portfolio of accounts which will provide an attractive spread of risk for the carrier and help you avoid the situation where the carrier only insures your low-risk accounts, leaving you without coverage on your higher risk accounts.  Additionally, a trade credit insurance broker with strong relationships can negotiate the best terms and rates.

A Lesson Learned…

A company decided to investigate using Trade Credit Insurance in order to comply with the terms of their asset-based loan. The bank was willing to accept all their export accounts as collateral with the exception of the Mexican accounts.  Insuring all their export accounts was discussed, but ultimately the decision was made to purchase a policy only insuring the Mexican accounts, meeting their banks’ minimum requirement.  Mid-policy period, one of their Canadian accounts, a loyal customer with a long history of ontime payments, declared bankruptcy causing a loss of $250,000. At renewal, the decision was made to insure all of their export accounts.