Credit Insurance: The Time Is Now
We are quickly moving through the year with many questions and uncertainties.
Company bankruptcies are on the rise. Payment default is at an all time high.
For businesses trading on open credit terms, there hasn’t been a better time to protect cash flow from losses due to customer non-payment default.
Accounts receivable are an important component of any company’s balance sheet. Cash flow, profitability, and loss avoidance are affected by how well credit decisions are managed. For many businesses, accounts receivable are one of the last major assets left uninsured. Make one bad credit decision and a catastrophic loss could have a serious impact to the bottom line. On the other hand, be too credit restrictive and customers will take their business elsewhere.
Today, having accurate financial information and making proper credit decisions are critically important in protecting cash flow from sudden losses and maintaining a financially strong business. In the United States alone, the number of bankruptcies continues to rise, with over 60,000 corporate bankruptcies filings projected by the close of 2010. These are staggering numbers, considering in 2009 there were 55,000 business filings, and in 2008 over 34,000 filings, according to the Administrative Office of the US Courts. But bankruptcy is only part of the problem. There are businesses operating today that are considered financially distressed, paying habitually slow, which, for the company holding the delinquent receivables, can cause significant cash flow problems and/or unexpected business interruption, and in some cases, outright failure.
While this reality may sound bleak, it doesn’t have to be this way. If your company ships on open credit terms to your customers, there’s no reason to shoulder the risk yourself. Credit insurance can help your company protect itself from these unexpected events. In exchange for premiums between .25 – 1% of annual sales, your credit insurance policy lets you transfer the risk of “doing business” to another entity, guaranteeing that you’ll be paid for the products and services you sell. Using it as a sales tool, you can ship freely to existing customers without risk of loss, while creating brand new opportunities selling to customers who were considered too risky in the past. Whether selling domestically or abroad, credit insurance can easily help you gain market share over competitors who restrict their own sales because they don’t have the same insight as you, and do not yet have credit insurance protecting their own accounts.
With the benefits associated with credit insurance, and there are many, it’s a product that is often misunderstood. Oftentimes, when credit and financial executives enter into discussions about credit insurance, a general assumption is made that customers with long time, positive trading histories will never default.
Here are some typical responses from executives regarding the subject:
- “I’m not worried about our major accounts, we’ve been doing business with these customers for years.”
- “Our key buyers never miss a beat and always pay within terms. We have great relationships with all of them.”
- “If any of my top customers filed bankruptcy tomorrow, it would hurt not only my business, but every one of my competitors businesses as well. That’s the only insurance I need.”
While the confidence these executives have in their customers’ ability to pay their trade obligations is understandable, the justification is not. This is because credit insurance companies see an entirely different story. Businesses of all shapes and sizes, no matter where they trade, experience pressure from many sources — shrinking margins, higher operating costs, stiff competition, and poor collection recovery on their own receivables. Any one of these conditions can develop into significant cash flow problems for any business causing that “perfect trading relationship” to fail unexpectedly.
A company’s ability to pay their trade obligations has very little to do with how large they are or how long a trading relationship has been established. Today’s economic and financial pressures can take down even the largest 600lb gorilla – and any supplier without protection on their accounts receivable could easily experience business interruption or outright failure, particularly in highly concentrated situations.
Credit insurance companies are seeing business defaults more frequently than any other time in history. To offset the effect of this for policyholders, accurate and up to date trading histories on companies are maintained, identifying firms that are habitually delinquent in paying their suppliers. This is critical information – as it provides an early warning system to policyholders to help with their credit decisions. This data also allows credit insurance companies to analyze trends and identify companies that may have just defaulted with other vendors. History shows that even if these defaulting companies continue to pay only a handful of suppliers, they’ll likely stop paying all their vendors in the near term.
For the executive who believes to have a stellar trading history with a large, key account, how valuable would this information be upon discovery that this same account recently defaulted on payments to 30 of their other suppliers? Priceless, especially when it’s realized that they’re probably next in line.
Partnering with the right trade credit insurance company with access to critical buyer information can help steer a business away from unnecessary financial risk. This kind of business intelligence combined with credit insurance protection makes smart business sense for today’s corporations.
Have a question about credit insurance? Feel free to call us at 1-844-315-4985 or contact us directly by using the form to the right.