Here are five important facts about Accounts Receivable Insurance that every small business owner needs to know.
- Why you need receivables insurance
- One policy covers multiple customers
- How much does receivables insurance cost
- Receivables insurance as a sales tool
- Receivables insurance as a financing tool
1. Why you need receivables insurance
You need to offer competitive payment terms to your customers. But what happens if they go out of business, file bankruptcy, run short on cash, or don’t pay your invoices for some other reason?
Accounts receivable insurance protects against defaults resulting from customer insolvencies, business closures, ownership changes, cash flow problems, balance sheet issues, bad faith, fluctuating demand, natural disasters, general economic conditions, and other nonpayment risks.
2. One policy covers multiple customers
All of your company’s insurable sales can be covered under one accounts receivable insurance policy. A specific credit limit will be approved for each of your customers or, if you qualify for a discretionary limit, your policy will insure the credit decisions you make yourself based on your own experience.
Alternatively you can apply for a receivables insurance policy covering only your largest customers. Or you can be even more selective, as long as the sales you want to insure represent a reasonable spread of risk. Policies covering just a single customer are less common, but may be feasible in some cases for a very creditworthy debtor.
3. How much does credit insurance cost
Premium rates for accounts receivable insurance are based on the terms you extend, the spread of your buyer and industry risks, and your company’s previous credit and collections experience.
The cost of receivables insurance is low, typically a small fraction of one percent of your covered sales volume.
Whether or not you pass this incremental expense to your customers, the price of receivables insurance is insignificant compared to the additional business you can obtain by extending competitive credit terms while protecting your sales against nonpayment losses.
4. Receivables insurance as a sales tool
You can increase your company’s sales by using trade credit insurance to extend competitive payment terms. Credit makes it more economical for your customers to order larger quantities, enabling you to negotiate better pricing from your suppliers, make longer manufacturing runs, and reduce your inventory carrying costs.
The opportunity to penetrate emerging markets and industries has never been greater. You can start doing business in sectors you might otherwise perceive as too risky for payment terms by using accounts receivable insurance.
5. Receivables insurance as a financing tool
Accounts receivable insurance makes your receivables more attractive to banks and other lenders, You’ll strengthen your balance sheet and keep your company’s financial position secure with receivables insurance, despite exposure to unforeseen events, concentrations of credit risks, and changing market conditions. Insuring your receivables may also enable you to reduce your bad debt reserves.