Trade Credit Insurance
Extending credit to your clients isn’t just a nice perk, it’s expected in today’s business climate. Credit not only enhances the purchasing power of your customer base, it can also attract prospects that may not have otherwise been able to buy from you.
However, offering credit or extending credit has the potential for disaster, as just one late payment or customer insolvency can put stress on your organization’s cash flow and profitability. That’s where trade credit insurance can help. Trade credit insurance, also known as credit insurance or account receivable insurance, is a form of insurance that transfers risk for businesses seeking to protect their accounts receivable against nonpayment or insolvency.
Here are two real life scenarios of how trade credit was used to protect companies in the Midwest.
Claims Scenario: Willingness v Ability
The company: A midsized retail company that specializes in textiles, toys and accessories
The challenge: The company recently completed a large transaction with reputable, financially sound big box retailer. The big box store had placed a six figure PO with company for an order to be imported oversees and delivered to the retailer. After receiving the order the retailer decided they no longer wanted or needed the supplies and was refusing to pay. Being the big box was a larger organization they tried to negotiate a percentage of what was owed as a settlement. The client having trade credit consulted on their options and decided to file a claim against the retailer (Know Your Policy). After due process from the carrier a check was paid to client for amounts owed within 60 days of claim being filed.
Trade credit insurance in action: When a customer can no longer make payments, or in this case becomes unwilling to make a payment it has an impact on the organization offering goods. For the company above having the backing of trade credit allowed for them to pursue the full amount owed and not settle. When one customer abuses credit, it affects an organization’s ability to extend credit to other customers and overall cash flow. In instances like this, trade credit insurance is invaluable at willingness vs ability to pay.
Claims Scenario: Growing Pains
The company: A growing manufacture
The challenge: An automotive manufacturer was looking to expand their operations overseas due to the new revenue potential. However, because the company was so young, it was difficult to take any major risks – risks like expanding to new markets. This hurt the organization when an international buyer approached them and wanted to place a large order.
While the purchase would have been the biggest in the manufacturer’s history, the deal fell through. The customer didn’t have enough working capital (Insure Foreign AR) to get the deal done on cash and it was too risky for the auto manufacturer to take the buyer on credit.
Trade credit insurance in action: Without the right coverage, every sale you make on credit is a gamble. For the automotive manufacturer above, trade credit insurance would allow the organization to provide prospects with more ways to close a deal both financially and from a credit standpoint.
Trade credit insurance can also be incredibly beneficial for young companies, as it helps combat concentration risks. This means that, if the auto manufacturer relied on a few large accounts to stay afloat, they are protected in the event that their best customers become insolvent.
Source: Gary Daggett & Zywave