The risks in trade include political risk, such as a government halting outbound payments during a crisis or devaluing its currency. It can also be the risk of buyer’s insolvency or defaulting on payments.
But for companies engaging in trade, there are ways to insure and protect payments: trade credit insurance, also known as accounts receivable insurance. What’s more, sophisticated organizations can use this coverage to expand business and facilitate growth.
While it can be used for any company with accounts receivable, trade credit insurance has special importance for companies engaging in foreign trade.
How trade credit insurance protects companies
Trade credit insurance protects against the risk that the buyer of goods or services won’t pay the seller. The risks trade credit insurance covers include the following:
- A payor’s insolvency
- Defaulting on payments
- Non-acceptance of goods
- Losses resulting from war or civil unrest
- Currency devaluation
Coverage may begin at the beginning of the contract, when goods are shipped, or when services are rendered or invoiced.
Considering the tight margins in many industries, some business owners may be reluctant to spend on credit insurance. However, in the event of non-payment for goods sold, those thin margins could make it that much harder to overcome that loss.
How companies can use accounts receivable insurance for growth
Many businesses may not think of trade credit insurance as a lever to increased financing and growth. But consider the following:
- Accounts receivable is often mandatory for credit. While accounts receivable is often one of the largest assets on a balance sheet, it’s often uninsured. Many financial institutions won’t offer credit terms for lending on accounts receivable unless the company has insurance on those receivables.
- Trade credit insurance can result in increased credit. As it provides the creditor with additional security, accounts receivable insurance can mean better terms for a borrower. For example, a lender could boost the margin ratio from 75% to 90% when the borrower has trade credit insurance. So for a company insuring $10 million in receivables, the increase could result in $1.5 million more in financing.
- Additional financing results in more flexibility. Additional financing can provide a company with greater flexibility and confidence, allowing them to enter into contracts or conditions that might not otherwise be available. That flexibility can mean the difference between clinching a sales deal or watching it fall apart.
Additional capital can also be leveraged into faster incremental growth while protecting against a critical risk. What’s more, if companies take the opportunity to use extra financing to facilitate growth, the additional revenue and profit can help offset the cost of the trade credit insurance.
Contact HUB’s experts to learn more about how trade credit insurance can protect your business and help expand it as well.