Trade Credit Insurance: More Important Than Ever For Your Business

We live in an age of great economic uncertainty. From 2006 to 2010, bankruptcy cases filed in federal courts for the fiscal year 2010 were up more than 113 percent. Take into consideration record unemployment, troubled markets throughout Europe and rapidly changing currency policies, and it's clear that businesses - especially those servicing foreign markets - are facing new found risks. In this environment, even the best of customer - those with the best of intentions and outstanding payment records - can struggle to meet their payments. In the past, when a customer defaulted, the result was simple: the customers' cash flow problem was now their own.

Now more than ever, it's important to protect your business from bad debt, particularly if your business depends on a small number of customers for a significant part of your revenue. Remarkably, many businesses are unaware of credit insurance and how it can help their business by mitigating risk.

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Credit insurance, also known as accounts receivable insurance or business credit insurance, is an insurance product that protects businesses against bad debt. In simplest terms, if a business owns an accounts receivable insurance policy, and one or more of your customers covered by the agreement defaults, the insurance policy will pay. Typically, accounts receivable insurance agreements are structured to pay an agreed percentage of an invoice or receivable that remains outstanding as a result of bankruptcy, insolvency or protracted default.

In many cases, the insurance premiums are charged to the policy holder on a monthly basis and are calculated as a percentage of sales or as a percentage of all outstanding receivables. For businesses, this means that policies may be tailored to your unique needs, selecting the customers that your wish to insure.

How Credit Insurance Can Help Your Business

There is no shortage of benefits:
Protection against bad debt, particularly against the potentially devastating impact of one of your key customers defaulting on paying their debt. If your business is debt-financed, using credit insurance to protect your accounts receivable enables you to demonstrate more secure assets, often leading to an increased borrowing capacity and reduced fees. For example, in the case of international trade, credit insurance enables the exporter's bank to consider otherwise ineligible foreign receivables as collateral. It allows companies to more rapidly expand their business into new and emerging markets in a safe and cost-effective manner. It makes you smarter, enabling you to increase credit lines to existing customers, enter new markets or extend credit to new customers armed with the information you need to make intelligent, informed decisions. And, credit insurance is vastly superior to letters of credit (L/Cs) in lowering the financial risk involved in international trade. Letters of credit are costly and a burden to customers, freezing a portion of their credit.

From GM to Lehman Brothers, the global recession has driven once untouchable stalwarts to their knees and into bankruptcy courts, passing the buck to their suppliers, triggering a painful domino effect that can still be felt today. For smart businesses who want to navigate international markets with confidence, credit insurance is an invaluable financial instrument.

Trade Credit Insurance: More Important Than Ever For Your Business

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