Extending credit to your clients isn’t just a nice perk, it’s expected in today’s business climate. Credit not only enhances the purchasing power of your customer base, it can also attract prospects that may not have otherwise been able to buy from you.
However, offering credit has the potential for disaster, as just one late payment or customer insolvency can put stress on your organization’s cash flow and profitability. That’s where trade credit insurance can help. Trade credit insurance—also known as credit insurance or export credit insurance—is a form of insurance that transfers risk for businesses seeking to protect their accounts receivable against nonpayment. Here are just a few examples of how trade credit insurance can prove invaluable for a variety of clients.
Claims Scenario: The Missing Company
The company: A mid-sized retail company that specializes in office supply sales.
The challenge: The company recently completed a large transaction with a loyal customer. The customer was opening a new location and needed a large quantity of new office supplies. When negotiating the terms of the sale, the customer asked for a payment extension, as they needed time to get on their feet before they could settle their moving expenses. This is not an unusual request, and the office retailer was happy to provide an extension on credit to a consistently trustworthy client. However, on the new payment due date, no money arrived. After several past due notices were sent out, the retailer contacted their lawyers and found out the customer’s company was under financial stress. No payment was made, and the retailer was out thousands of dollars.
Trade credit insurance in action: When a customer can no longer make payments, it has a sweeping impact on the organization offering goods and services. For the office supply retailer above, the revenue lost from the customer not only impacted their balance sheet, but their entire client base. When one customer abuses credit, it affects an organization’s ability to extend credit to other customers. In instances like this, trade credit insurance is invaluable. The right policy can provide cash flow relief in the event of nonpayment.
Claims Scenario: Closing Deals Overseas
The company: A growing auto manufacturer focusing on fleet sales.
The challenge: An automotive manufacturer was looking to expand their operations overseas due to the new revenue potential. However, because the company was so young, it was difficult to take any major risks—risks like expanding to new markets. This hurt the organization when an international buyer approached them and wanted to place a large order. While the purchase would have been the biggest in the manufacturer’s history, the deal fell through. The customer didn’t have enough working capital to get the deal done on cash and it was too risky for the auto manufacturer to take the buyer on credit.
Trade credit insurance in action: Without the right coverage, every sale you make on credit is a gamble. For the automotive manufacturer above, trade credit insurance would allow the organization to provide prospects with more ways to close a deal. Trade credit insurance can also be incredibly beneficial for young companies, as it helps combat concentration risks. This means that, if the auto manufacturer relied on a few large accounts to stay afloat, they are protected in the event that their best customers become insolvent.
Benefits of Trade Credit Insurance
- Improved sales — Businesses with trade credit insurance can boost their sales by offering customers and prospects more favorable credit terms while eliminating the need for costly letters of credit.
- Access to new markets — Trade credit insurers offer protection against unique export risks by providing businesses with the market knowledge needed to make informed decisions in foreign markets.
- Insolvency protection — In regards to sales made on credit terms, trade credit insurance protects organizations from the risk of a customer default or insolvency.
- Cash flow relief — Trade credit insurance provides cash flow relief when a business’s customers become insolvent or don’t pay their bills on time. Losses can be indemnified, allowing the business to maintain its cash flow.
- Reduced concentration risk — Trade credit insurance mitigates risks for businesses whose bottom line is dependent on a select number of customers.
- Accounts receivable support — Trade credit insurers offer businesses access to professional trade credit analysts who can share best practices with a company’s credit department.
- Collection services — Trade credit insurance provides access to cost effective collection services.
Accounts receivable are often a business's largest asset. If your customers are unable to pay what they owe, potential credit losses can present a substantial threat to your business. Even the best customers can miss payments or dissolve altogether. When this happens, your organization suffers, and it’s important to have the right protection when you need it most. Contact Higginbotham to learn more about trade credit insurance.