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Make Your Long-Tail Customers More Profitable


Posted by Michael Noble - 17 November, 2021

The Unexpected Benefits of Trade Credit Insurance

Small and medium-sized businesses face great financial challenges today. Although the most recent economic recession is long over, and the global economy is blossoming, with technology as one of the driving forces, competition can be fierce. Frankly, it’s incredibly costly to build, maintain, and grow a business in today’s day and age.

It’s clear that businesses of all shapes, sectors, and scopes face their own financial challenges, one such challenge is risking bad debts or unpaid accounts receivables. Shockingly, the average small business owner carries over $195,000 in debt, so dealing with unpaid customer bills and watching customer accounts sit in default can wreak havoc on the financial health of a business.

Although increasing sales and marketing tactics to convert more customers, improving cash flow and trying to sustain a profit (if you’re lucky) is more difficult than it seems, businesses are more in control of their cash flow than what they might think.

In fact, there is a multitude of ways to maintain healthy cash flow, and one such method is mitigating financial risks of bad debt simply by purchasing trade credit insurance.

So, what is trade credit insurance, and how does it work? Let’s look at what trade credit insurance is and how it can benefit your business.

What is trade credit insuranceWhat is Trade Credit Insurance?

The purpose of trade credit insurance is to protect businesses and avoid financial losses due to unpaid accounts receivables, customer default accounts or even customer bankruptcy.

One problem with trade credit insurance is that it has quickly become really expensive, and a luxury that many small businesses assume that they can’t afford. However, trade credit insurance can help mitigate financial risks associated with consumer debt or large accounts receivables. Trade credit insurance, if done right, can be a great business investment.

Businesses that need receivable insuranceWhich Businesses Benefit from Trade Credit Insurance?

Many businesses can benefit from trade credit insurance. To break it down a bit further, any company that sells good or services or extends credit to customers, particularly those businesses that deal with more than $5 million in sales (foreign or domestic sales) are the best candidates for trade credit insurance.

While some industries, such as mining, energy, metals and automotive will benefit the most from trade credit insurance, it really comes down to the type of business and sales that matter most. Businesses that operate in high-risk industries or that have a high risk of customer default or nonpayment will find it beneficial to purchase trade credit insurance.

So, take a good look at your own business. If the total amount of your accounts receivables are enough to impair your products, services or your business as a whole, then it might be a good idea to purchase trade credit insurance.

It’s also worth mentioning that companies that wait until their receivables are unpaid to purchase trade credit insurance will risk the ability to acquire trade credit insurance at all. It may be too late or they may end up paying higher rates due to elevated risks.

cost of credit insuranceHow Much Does Trade Credit Insurance Cost?

What does trade credit insurance cost? We hate to give the “it depends” answer, but the cost of trade credit insurance can greatly depend on the business, the industry, sales volume and the overall risk associated with the amount of the receivables and customers. Most insurance companies that offer trade credit insurance have standard rates according to the levels of risk.

However, businesses are more in control of their trade credit insurance rates than they think. Businesses can control the costs of their policies by selecting the number of clients or accounts they want to insure as well as which insurer they prefer to work with to underwrite their policies.

Businesses may also be able to choose the number of days past due before the policy kicks in and even select a percentage of the unpaid invoice that the trade credit insurance policy will cover. All of these selections can help reduce the cost of trade credit insurance—depending on the policy and insurer, of course.

is insuring receivables right for your business?What Should Businesses Consider Before Purchasing Trade Credit Insurance?

So, how do you know where to start? First, consider the breaking point of what your business can realistically afford if receivables go unpaid. For example, if your business can afford a bad debt expense of $50,000, then this might be a good deductible to start with.

It’s important to remember that only a handful of insurance companies are knowledgeable of, understand or even offer trade credit insurance. Therefore, businesses should work with insurance brokers who understand the trade credit insurance business and don’t just claim to be familiar with the product. Because trade credit insurance involves a great deal of flexibility and ways to set up the policy, it requires a broker who is an expert in trade credit insurance to ensure that your business acquires the right policy.

is it a good investment for trade transactions?Why is Trade Credit Insurance a Good Investment?

Although we have talked a lot about how trade credit insurance can help mitigate financial risks surrounding default accounts or accounts receivables, many businesses have used trade credit insurance as an investment vehicle to help grow their businesses.

For example, businesses can use trade credit insurance as a credit line to offer to clients and to also sell to international entities, which can help make businesses larger, stronger, and even expand geographically while also reducing risks.

Pros and cons of trade insuranceTrade Credit Insurance: Avoiding Financial Losses and Promoting Future Growth

In conclusion, trade credit insurance doesn’t pay out losses or damages as claims arise, such as the case with car insurance. You would only call your insurance agent and put in a claim if you were in an accident. The ultimate goal of trade credit insurance is to help businesses avoid losses and damages altogether.

All in all, trade credit insurance certainly provides businesses in various industries and models with a risk mitigation tool that reduces financial risks and even positions businesses for future growth, expansion, and further development.

However, trade credit insurance should only be purchased by an experienced, reputable broker to ensure that your business secures the right type of trade credit insurance policy that best fits your business.

Keep in mind, trade credit insurance only mitigates the risk of extending credit but does not improve cash flow. To get the best of both world, look at Apruve.

Net terms accounts receivable

Topics: Finance, Credit, Management

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Apruve enables large enterprises to automate long-tail credit and A/R so you can stop spending 80% of your time and resources on 20% of your revenue. We partner with each of our customers to solve their unique credit, payment, and accounts receivable challenges and build the right credit solutions for your markets, customers, and goals. 

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