Trade Credit Insurance: Corporate Bankruptcies
 We hear it on the news. We read about it in the papers. 2009 is pegged to be the most disruptive year since the Great Depression with regard to projected commercial bankruptcies and business defaults. Analysts predict that by the end of the last quarter of 2009, there will be over 100,000 corporate bankruptcy filings, massive corporate layoffs, and continued erosion of capital markets.No matter what industry sector you may be in, now is a critical time to take a look at what a credit insurance policy can do for you. |
If you have been following this blog since we began writing about credit insurance back in May of last year, you know the case has been made as to why it is crucial to consider trade credit insurance as part of your over all business strategy. Throughout 2009, you will learn the facts on how your company can trade safely in today’s volatile business climate, limiting your exposure to risk, enhancing your liquidity position, and generating positive revenue growth.
Our goal is for you to see this product as a tool that can protect your bottom line and make you money at the same time. With over 400 corporate bankruptcies filed in this country every business day, it shouldn’t take long for you to see how important credit insurance can be for your business. Stay tuned for our next article, or better yet, call us today.
Have a question or comment about trade credit insurance? Feel free to contact us using the form to the right or call 1-631-585-0960.
Trade Credit Insurance: Impact of Bad Debt Loss
| So what does it really cost your company when your customers fail to pay you?The truth can be shocking.
Let’s examine multiple scenarios and the impact of each. |
| LOSS AMOUNT & MARGIN | SALES REQUIRED TO BREAK EVEN |
|---|---|
| $50,000 loss @ 4% margin | $1,250,000 |
| $100,000 loss @ 4% margin | $2,500,000 |
| $500,000 loss @ 4% margin | $12,500,000 |
| $1,000,000 loss @ 4% margin | $25,000,000 |
| LOSS AMOUNT & MARGIN | SALES REQUIRED TO BREAK EVEN |
|---|---|
| $50,000 loss @ 8% margin | $625,000 |
| $100,000 loss @ 8% margin | $1,250,000 |
| $500,000 loss @ 8% margin | $6,250,000 |
| $1,000,000 loss @ 8% margin | $12,500,000 |
| LOSS AMOUNT & MARGIN | SALES REQUIRED TO BREAK EVEN |
|---|---|
| $50,000 loss @ 15% margin | $333,000 |
| $100,000 loss @ 15% margin | $666,000 |
| $500,000 loss @ 15% margin | $3,333,000 |
| $1,000,000 loss @ 15% margin | $6,666,000 |
These charts illustrate the break even point, in other words, how much additional sales would be necessary in order to break even on a given loss. The impact for many companies to replace these sales can be severe depending on the size of the loss relative to the size of the company. Staggering, isn’t it? Keep in mind these scenarios assume only one loss at a time - if there are multiple losses within the same year, the effect can be devastating. Simply plug in your own margins and determine the impact unexpected losses can have on your sales, operational costs & cash reserves.
Trade credit insurance can help prevent these scenarios from impacting a business. Premiums are easily justified when looking at the excessive costs of not insuring. Trade credit insurance can help any company avoid such surprises.
Have a question or comment about trade credit insurance? Feel free to contact us using the form to the right or contact us directly at 1-631-585-0960.
Trade Credit Insurance vs. Exim Bank Restrictions
 Companies seeking to mitigate their risk on foreign receivables sometimes find themselves having difficulty in differentiating trade credit insurance from the services offered by Exim bank. On the surface, there appears to be little difference in the function of Exim bank compared to private firms offering trade credit insurance. Exim bank was established as the Federal Government’s way of trying to help businesses offset risk and actively encourage exports of American goods. |
Some services offered by Exim bank parallel those offered by trade credit insurance firms. However, the major difference in the two is the simple fact that the Exim bank is a part of the US Government, and anything attached to the federal government means regulation. The drawbacks of using the services of Exim bank are many. In addition to the high expense typically associated with an Exim Bank policy, as a part of the US Government, Exim bank has numerous regulatory hurdles that must be overcome, while trade credit insurance is a simple contract between two private companies allowing for the most flexibility. Additionally, Exim bank has on more than one occassion received negative press indicating that it discriminates politically by offering its services to those special interests that powerful political groups favor while leaving those without such connections to fend for themselves.
Any company trying to decide between the services of the Exim bank and acquiring a trade credit insurance policy privately would do well to consider the political ties of the Exim bank. A company wishing to control its risk without being forced through extra regulatory hoops or being required to do business with only those parties favored politically would do well to keep in mind that a private trade credit insurance policy allows a company greater flexibility to do business as they are usually accustomed. Using Exim bank can mean the possibility of navigating a political swamp causing frustration for policyholders.
Have a question or comment about trade credit insurance? Feel free to contact us using the form to the right or call 1-631-585-0960.
Trade Credit Insurance vs. Risk of Self Insuring
| Self insuring is the concept that a business sets aside cash to cover losses incurred due to the default of outstanding receivables. In today’s volatile and uncertain economic climate, there is very good reason to not self insure and every reason to protect your company with trade credit insurance.The primary reason one should not self insure is due to loss of leverage. ‘Leverage’ is the concept of getting an exponential return on your resources through the services of a third party as in the case when you take out a trade credit insurance policy. In a self insurance situation, you are tying up the entire amount of the receivable in question for the entire term of the contract. In other words, your cash is already earmarked to cover your loss in the event of a customer default. On the other hand, with trade credit insurance, you use a fraction of the total value of that contract to protect you against default, allowing you to maintain a cash buffer for miscellaneous expenses.
Companies who do not maintain enough leverage in their day to day operations are companies who are not in a position to take advantage of unexpected opportunities. They are also far more exposed to financial disaster. Those companies who self insure instead of using trade credit insurance can find themselves in a position where a big loss freezes their ability to expand (or even to operate as normal). That’s the beauty of using trade credit insurance - the cost is just another expense and you never have to fully absorb a loss to your bottom line. In today’s business world, we are seeing a great deal of financial turmoil. The problem for a company who sells goods or services business-to-business without trade credit insurance is the exposure to every financial danger faced by each and every client. While your company may sell software at the OEM level, your client may provide that software along with service, to a mortgage lender who is going bankrupt. Your only way of knowing this is to maintain a large staff to examine the details of a client’s finances, as well as investigate the day to day operations and details of how your clients make their money. Trade credit insurance provides the leverage for a company to use a fixed amount of money to defend against a much greater potential loss. Along with this, it allows a company to stick to its core business instead of delving into the expensive process of learning and monitoring each intimate financial detail of every individual client. Have a question or comment about trade credit insurance? Feel free to contact us using the form to the right or call 1-631-585-0960. |
Trade Credit Insurance: Political Risk Coverage
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Many companies that are involved in international business don’t understand the nightmare that political upheaval can cause when it comes to their receivables. Trade credit insurance can eliminate this nightmare. Political risk coverage is a type of trade credit insurance that eliminates the difficulty of converting foreign currency to local currency. Usually, this is a non-issue since there is a booming foreign exchange market set up just for this purpose. Certain political situations can make it impossible to convert a given currency. |
Take a small country that is in the midst of a coup, will the new leadership honor the existing debts of the previous leadership? The willingness to honor debts is what determines the global value of a country’s currency (since money is simply a representation of a country’s willingness to honor its value).
What about a country that has been declared a rogue nation by the global community? Such a declaration is generally accompanied by economic sanctions against the rogue nation (including restrictions of trading in that country’s currency). Once again trade credit insurance can be the difference between getting paid or delivering goods and services for absolutely nothing.
It’s the dream of many companies to expand into the global marketplace. Often this expansion is done without really understanding some of the political ramifications of doing so. Any company doing business in an unstable region (or any company that is unsure of political conditions) should use trade credit insurance to guarantee that the hard work of its management and employees will actually bring the income it hopes for.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact us directly by using the form on the right.
Trade Credit Insurance: Attracting Investors
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Just what does Trade Credit Insurance have to do with prospective investors? More than most realize. Whether you are a small company looking for investors to help you get to the next level, a company going through the process of an IPO, or a publicly traded company, investor confidence is the determining factor for your companies valuation, and Trade Credit Insurance builds investor confidence. |
Take the stock market - The company’s hard assets are only a starting point for investors deciding whether to purchase a company’s stock. Trade Credit insurance does two things that boost the confidence investors have in the future prospects of a company.
First, investors look at the hard assets a company owns (including receivables). Knowing that a company has taken the appropriate actions to protect those assets lets investors know they will be buying into a company whose value won’t suddenly drop through some fiscal or physical disaster.
Second and more importantly, Trade Credit Insurance lets a prospective investor know that the management behind the company is wise enough to ensure the future of said company. Investors put forth their money for one purpose - to make a profit. They know that having a strong management team is the best indicator that a company will grow and build that profit they seek.
Investors weigh many factors when choosing how much money to risk on a company. Trade Credit Insurance can give a substantial boost to both the current assessment of a company’s value and the future growth and prosperity of that company.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact us directly by using the form to the right.
Trade Credit Insurance: Early Warning Signals
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When establishing credit limits for buyers, many companies rely on mercantile reports (such as D&B), trade references, and prior trade experience to determine whether a buyer is a safe credit risk. While these methods are acceptable tools used by many companies, they do not provide the real time financial intelligence needed by most credit professionals in order to make credit decisions with absolute confidence |
Trade Credit Insurance companies maintain large databases that are continuously updated by their policyholders identifying payment patterns of millions of businesses around the world. This information is accessible in real time to the credit insurer and is monitored to provide early warning signals to policyholders who unknowingly extend credit to companies who are experiencing financial difficulties.
Because credit insurers can identify when a company has slowed or failed to make their payments to other policyholders, this information serves as a crticial warning system allowing policyholders opportunities to hold back shipments or reduce credit limits before experiencing a default. This early warning system is built in to most Trade Credit Insurance policies and is a critical service that can prevent companies from making risky credit decisions that could cause significant losses to the bottom line.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact us directly by using the form to the right.
Trade Credit Insurance: Common Exclusions
Every trade credit insurance policy has exclusions describing what it will and will not pay. Although this post will not attempt to identify them all, it will identify a few of the more common exclusions found in most policies. Some typical exclusions include:Trade Disputes. Quality, fulfillment, and performance disagreements between a seller and buyer are not covered until a judgment is awarded in favor of the insured. Once a winning judgment is produced to the insurer, the claim qualifies for payment.
Maximum Collection Period. If a buyer has outstanding invoices that are overdue beyond the agreed collection period, only those invoices qualify for payment. Any new invoices from that buyer would not be covered.
Maximum Terms of Sale. A transaction that occurs outside of the normal terms of sale would not qualify for payment. For example, if a buyer requests an exception to the normal collection period indicated in the policy, ie. net 30, net 60, this would not be covered.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact us directly by using the form to the right.
Trade Credit Insurance: Common Misconceptions
There are many significant advantages of trade credit insurance. Some major benefits include cash flow protection, opportunities for sales expansion, enhanced financing availability, asset securitization, and direct access to expert credit information on businesses worldwide. While trade credit insurance is an extremely valuable tool for businesses selling on open terms, there are a few misconceptions about the product requiring further clarification.For one, trade credit insurance does not attempt to replace a company’s internal credit department, rather, it enhances it by providing real time credit information and financial guarantees on the credit decisions made. The relationship between a credit insurer and an internal credit department is a dynamic one. There is an ongoing exchange of credit information and a strong underwriter reliance on the due-diligence capabilities of the insured. Premiums have a direct relationship with how companies perform their own due-diligence when granting credit.
Second, trade credit insurance is not designed to cover small, everyday losses, rather, it is designed to be the safety net used to reimburse the insured for larger, catastrophic losses that would have significant impact to cash flow. If a company experiences losses of $15,000 every year, for example, a deductible would likely be set at $15,000 to be absorbed by the insured as a form of risk sharing. This illustrates the point that a company’s internal credit department plays an important role in the process.
Finally, trade credit insurance is not factoring where receivables are purchased and cash is advanced at higher premiums. Quite the contrary, trade credit insurance is a risk mitigation management tool that guarantees and secures a company’s accounts receivable from unforeseen loss, allowing the insured to borrow more capital at favorable rates, while leaving full control over customer relationships with the insured.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact us directly by using the form to the right.
Trade Credit Insurance: Questions Answered
Q: How do I know if trade credit insurance makes sense for my business?
A: It’s often best to speak with a trade credit insurance professional who can evaluate your business situation and make a recommendation based on specialized knowledge of the product. Your business may be suitable for trade credit insurance if any or all of the following general guidelines are true:
- You sell to customers on open credit terms
- Your business has annual sales exceeding $1,000,000 per year
- You have high accounts receivable exposure with a few large accounts
- You’ve experienced bad debt losses in the past
- You prefer not to tap into your own cash reserves in the event of a los
- Your business needs an edge on the competition
- You want to expand sales and open up brand new markets
- You want access to capital at some of the lowest rates available
Q: I currently have a commercial insurance package for my business. Is Trade Credit Insurance included?
A: No, not typically. Trade Credit Insurance is a highly specialized product and is usually never included with other business insurance you may have. While you may already be covered for fire, theft, and other liability insurance, Trade Credit Insurance compliments these coverages and protects one of your largest unprotected assets - accounts receivable - from loss.
Q. How are premiums calculated?
A: Premiums are based on a multiple of annual sales. Rates are influenced based on prior loss history, risk grade of companies insured, risk sharing coinsurance, and policy deductibles.
Q: We sell on Letter of Credit. How does Trade Credit Insurance help me?
A: Please see following article on the benefits of Trade Credit Insurance versus Letters of Credit by clicking here.
Q: How can a Trade Credit Insurance Policy help our company manage risk?
A: A properly structured Trade Credit Insurance Risk Management program will provide you with analysis and advance notification of financially troubled companies or industries. With this critical information, you’ll be in a position to avoid buyer default situations before being required to submit a claim.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact us directly by using the form to the right.
