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. 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 interruption 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 Trade Risk Strategies 1-844-315-4985
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