Corporate Risk Solution
Accounts receivable (A/R) can represent up to 40% of a company’s assets, and in today’s challenging environment, non-payment of any portion of this can become a serious financial and operational threat to an Business. For example, if a customer defaults on a $150,000 invoice from a company with a 5% profit margin, that company will have to generate $3 million in additional revenues to make up that loss.
The underlying reasons for a default could range from company mismanagement, the rapid rate of technological change and its effect on international consumer demand, to political upheaval in key markets, to regional economic trends and government economic policy changes—all of which can quickly change a customer’s risk profile and ability to pay invoices, and leave suppliers holding the debt.
Today’s competitive business landscape can squeeze company margins to the point where it does not take many bad debt write-offs to push the company to the breaking point. Effective management of (A/R) accounts receivable are, therefore, a vital component of a any healthy business.
A companies A/R can, however, be surprisingly volatile. What seemed like a stable business environment one day can become complete disarray the next. Fortunately there’s a proven solution to protect a business from potential A/R losses and even help expand sales. Whether trading with established customers or seeking new markets, a company can use trade credit insurance to protect its cash flow and balance sheet against the unexpected shock of non-payment.
No business owner or CFO would ever leave major assets like property, machinery, and equipment uninsured—the financial impact to the business from a fire or flood would just be too great. Yet CFOs especially in North America typically leave their largest and most vulnerable asset uninsured—their Accounts Receivable (A/R), which can account for 40% of a companies asset.
Below are ten reasons that companies typically insure their A/R via credit insurance.
1) Grow sales safely and strategically to new and existing customers. When receivables are insured, you can aggressively go after qualified customers, including those that may have previously been perceived as “too risky.”
2) Approve credit limits more quickly to capture more revenue opportunities. The insurer’s experience allows you to quickly make more informed decisions, and a shifting of A/R risk to the insurer backstops those decisions.
3) Maintain cash flow and profitability by mitigating your risk of bad debt. Your results will be predictable, regardless of A/R performance. And credit insurance premiums are tax-deductible, while bad-debt reserves are not.
4) Access better knowledge about your customers and prospects to help avoid losses before they occur. The credit insurer’s information database and technology allow you to make truly informed decisions.
5) Obtain more working capital, often at more favorable rates because insured receivables translate to secure collateral. Reduced bad-debt reserves also free up capital, and can qualify your firm for more favorable rates.
6) Offer competitive terms overseas so you can sell more to foreign markets. Protection against unique export risks, as well as leveraging the insurer’s market knowledge, allow you to make better decisions on where to grow.
7) Enhance the efficiency of your in-house credit team by tapping into the deep resources of a credit insurer. Your credit team will be making informed decisions about customers, rather than educated guesses.
8) Your A/R concentration risk. Receivables concentrated in a few large accounts would normally put the reliability of your company’s results at risk. Credit insurance mitigates that risk.
9) Enhance your customer relationships and be more competitive by safely raising credit limits or offering better terms. Actively supporting growing relationships sends a positive signal to your customers.
10) Sleep better at night knowing your risks are covered and your payments are guaranteed. Not that CFOs sleep that well, anyway…
A credit insurance policy, if used properly, provides a valuable extension to a company’s credit management practices. It provides a second pair of objective eyes when approving buyers, as well as an early-warning system if exposure is increasing. Lastly, credit insurance helps the CFO ensure that there are no surprises in reported results. Because nobody hates surprises more than the CFO.