By Mark Henricks
It is possible to protect accounts receivable with credit insurance. For many businesses, accounts receivable makes up a huge percentage of sales, and that makes it one of a company’s most valuable assets.
Business owners must think of accounts receivable as credit that is lent to customers. Just like any other credit account, accounts receivable is subject to default by the party that owes. A small business could be jeopardized by an important customer failing to pay for the goods and services that have been purchased. Credit insurance can alleviate some of the risks associated with collecting accounts receivable.
What Is Credit Insurance?
Credit insurance is sometimes referred to as accounts receivable insurance. It protects against financial loss when a covered customer defaults on payment, files for bankruptcy, becomes insolvent, or is liquidated while owing money for goods or products. In the case that a customer doesn’t pay, businesses with credit insurance are paid through the insurance policy.
Credit insurance has long been used in international trade and is becoming more common in domestic commercial business as well. Credit insurance mirrors the risk management features of a letter of credit.
There are several types of credit insurance that can protect against numerous risks. These include coverage in the case of:
Credit insurance can be obtained for domestic or international transactions. Policies may be tailored to cover only certain customers or products.
Who Should Get Credit Insurance?
Credit insurance may be most appropriate for companies that have large accounts receivables with customers whose creditworthiness is unknown or unreliable. It may also be particularly suitable for any business that has an unusually large amount of assets tied up in accounts receivable.
Credit insurance may open up new markets and growth opportunities. Credit insurance reduces the risk of selling to markets and customers that otherwise would represent unacceptable credit risks. Underwriters track credit markets carefully and may provide notifications of potential problems with specific countries and industries.
What Are The Costs?
The premiums for credit insurance policies are typically based on a company’s sales. They can typically range from 0.1% to 1%. Policies covering domestic businesses usually cost from 0.1% to 0.5% of sales. International transactions tend to cost more, ranging from 0.5% to 1%. Several other factors, such as a customer’s credit rating and the industry of the business, may influence the cost.
Most policies are renewable and are for one or two-year periods. Also, there may be a minimum loss level for the policy.
Note that there is a time cost associated with credit insurance. There could be a waiting period while a claim is being processed. When a customer becomes insolvent, such as filing for bankruptcy, the claim may be paid within 30 days. However, if there is a basic failure to pay or an uncontested default, the wait will be longer.
Credit insurance is an affordable way to protect your business.
The information and advice provided by Dun & Bradstreet Credibility Corp. is provided "as-is." Dun & Bradstreet Credibility Corp. makes no representations or warranties, express or implied, with respect to such information and the results of the use of such information, including but not limited to implied warranty of merchantability and fitness for a particular purpose. Neither Dun & Bradstreet Credibility Corp. or any of its parents, subsidiaries, affiliates or their respective partners, officers, directors, employees or agents shall be held liable for any damages, whether direct, indirect, incidental, special or consequential, including but not limited to lost revenues or lost profits, arising from or in connection with a business's use or reliance on the information or advice offered by Dun & Bradstreet Credibility Corp.