Every time you extend credit to your customers, your business incurs credit risk. While your accounts receivable may be one of the most liquid and valuable assets your company has, chances are it is also one of your least protected.
Practicing good credit management is the first step to securing your business' standing and protecting yourself from catastrophic risk. Begin with a formal credit policy that includes:
- A layered credit approval process that addresses new debtors and creditworthiness
- Credit limits for customers, including potentially lower limits for new customers until they have established a satisfactory payment record.
- Credit terms, which should include the length of time the debtor has to pay, with late payment fees communicated up front
- Guidelines for monitoring debtors regularly (quarterly, for example) for new, adverse information
- A series of formal actions should a debtor be consistently lax in its payment obligations
This formal policy should be clearly communicated to all potential business partners at the time of each purchase or new contract.
But, good credit management practices alone will not eliminate credit risk. The risk of selling goods or services to a third party on open credit terms is constant and will continue to evolve as markets swing and businesses grow and change.
Evaluating Your Need
A few key questions, according to HUB International trade credit insurance specialists Vanessa De La Cruz and Damion Walker, are critical to determining your need for trade credit insurance. If you answer yes to one or more of these questions, a trade credit insurance policy may be right for you.
- Do you want your business to grow?
- Are you looking to expand sales to new customers or territories where you're not familiar with doing business?
- Are your exposures growing because of the current economic rebound?
- Are your customers exposed to external risks that could cause them to default in their payment obligations?
Whether you sell locally, internationally or both, trade credit insurance helps secure payment for goods or services delivered to your customers. A trade credit insurance policy protects cash flow and profitability, within the terms and conditions of the policy, for the goods shipped or services rendered to your customers in the event that they cannot pay due to a financial default.
Trade credit insurance can strengthen your company's balance sheet, enhance your borrowing capacity and enable you to grow your business by providing protection from: insolvency (bankruptcy), protracted default (non-payment) and political risk (international risk). More specifically, these risks include:
- Chapter 7, 11 and administrative filings
- Continued delinquency/non-payment
- Broad peril political risk exposures
- Government intervention causing a non-payment
- Political violence/terrorism
- Currency inconvertibility
- Product confiscation post title transfer
An Ongoing Relationship
Because trade credit insurance carriers are underwriting your risks, you will also receive credit due diligence on all current and future customers. Leveraging their collective experience and knowledge of business and industry data, HUB trade credit brokers and trade credit insurance carriers will determine the risk levels for the specific countries and industries, down to the individual customers you sell to. This ongoing analysis and evaluation of both new and existing customer risk is a value-add to current trade credit insurance policies.
It is time to secure trade credit insurance and position your business for the next economic dip. With the market gaining strength, coverage is more widely available today than just a few years ago and at more competitive prices. Plus, insuring your receivables now will protect your company's critical working capital and ensure you maintain the cash flow required for the success of your business.
Just as you insure your cash, property, inventory and employees, it is wise to insure all your assets against normal and potential loss. HUB International's trade credit insurance specialists can help identify a tailored solution for your business. Start by contacting your HUB broker to learn more about how trade credit insurance can help you protect and grow your business.