What is accounts receivable insurance?
Accounts receivable insurance—which is also referred to as Trade Credit Insurance—protects a company’s valuable accounts receivable assets from risks of a political and commercial nature that are beyond an organization’s ability to control. It is designed to protect a company against financial losses that result from a customer that fails to pay what it owes to the company and from the loss of records caused by a covered event. Events that negatively impact a company’s accounts receivable have a direct impact on its cash flow and profits and could leave a company unable to collect money that is due from customers and creditors. It could also result in additional costs to the company.
When a client pays for an item or service on credit, comprehensive records allow a company to track payments and ensure timely payments as well as enforce interest charges for late payments. If those records are lost, the company could lose thousands of dollars in revenue. Accounts receivable insurance protects a company in these situations. It can also cover indirect losses such as interest payments due on loans covered by receivables. These concerns are becoming more significant as the percentage of trade debt comprising companies’ assets increases, resulting in a greater risk of loss from accounts receivables than from any other company asset.
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When do I need to be aware of accounts receivable insurance?
When customers and clients default on payments, are insolvent, or go bankrupt, a company experiences cash flow and revenue problems. In addition, events arising from political unrest or from a fire or a flood could wipe out a company's financial records. This might include the records of customers who have bought items on credit. When losses related to property damage and other kinds of unpredictable risks occur, accounts receivable insurance kicks in. Specific policies may differ, but the insurance could cover such items as lost revenue, record restoration, IT work, and added employee work hours. In most cases, the insurer will calculate potential losses based on the past performance of a company, possibly adjusting for seasonal differences.
What is important to know about accounts receivable insurance?
The insured has some options when deciding on accounts receivable insurance. Some items you should know about accounts receivable insurance are:
- The methodology of calculating losses may vary between insurers.
- The insurance usually covers expenses related to data loss recovery.
- The coverage normally applies to added collection costs.
- The coverage also pertains to interest charges on loans related to non-payments.