Credit Insurance: Insuring Your Accounts Receivable
By: Ashley Western, ACSR, MSM RMI
Commercial Business Development Manager
In this economy, keeping a tight reign on accounts receivable is an important task. If you had insurance coverage to protect those receivables, it may help you feel a greater confidence in doing more business. In this article, I will explain what credit insurance is, what items can be protected, and what to do if you'd like to find out more.
Credit insurance, also called accounts receivable insurance, provides your business with protection against the failure of your customer to pay its debts. This can come up because your customer becomes financially unable to pay the debt, or because your customer fails to pay you within the set time limit on the receivable. For companies exporting, credit insurance can also protect against uncertainty in doing business with countries that have a particularly bad political risk. Political risks are incurred when payment is not received from a buyer because of war in the buyer's country, government regulations that prohibit export & import, or restrict currency transfer.
Business credit insurance is for short-term trade accounts receivable, which is defined as those due in less than 1 year. It may make sense for your business if you have annual receivables of at least $1,000,000. Any business selling on open account terms to other businesses can benefit from credit insurance. Purchasers of credit insurance range from small businesses to large, multi-national companies.
On average, 40% of a company's assets are in the form of trade debts. Sometimes this figure is far higher. It is very difficult for a company to predict which client will default on payment. Close to 50% of all payment defaults arise from vendors with whom stable and long-term trade relationshipos have been established. A credit insurance policy helps in the management of your accounts receivable and compensates you in the event of non-payment.
If you would like more information on credit insurance, please call us at (713) 690-6000. We only need a small application and copy of your current accounts receivable in order to quote. Or, we can bring out a company representative to talk with you more on how credit insurance works.
Source: Euler Hermes ACI