No CFO would ever leave major assets like property, machinery, and equipment uninsured—the financial impact to the business from a fire or flood would just be too great. Yet CFOs in North America typically leave their largest and most vulnerable asset uninsured—their Accounts Receivable (A/R), which account for 40% of company assets, on average.
Credit insurance is a business insurance product that protects against losses from nonpayment of a commercial trade debt (i.e., A/R). With credit insurance in place, non-disputed A/R will be paid, by either the debtor or the credit insurer, within the terms and conditions of the policy. But credit insurance has other key benefits as well. Below are ten reasons that companies typically insure their A/R via credit insurance.
- Grow sales safely and strategically to new and existing customers. When receivables are insured, you can aggressively go after qualified customers, including those that may have previously been perceived as “too risky.”
- Approve credit limits more quickly to capture more revenue opportunities. The insurer’s experience allows you to quickly make more informed decisions, and a shifting of A/R risk to the insurer backstops those decisions.
- Maintain cash flow and profitability by mitigating your risk of bad debt. Your results will be predictable, regardless of A/R performance. And credit insurance premiums are tax-deductible, while bad-debt reserves are not.
- Access better knowledge about your customers and prospects to help avoid losses before they occur. The credit insurer’s information database and technology allow you to make truly informed decisions.
- Obtain more working capital, often at more favorable rates because insured receivables translate to secure collateral. Reduced bad-debt reserves also free up capital, and can qualify your firm for more favorable rates.
- Offer competitive terms overseas so you can sell more to foreign markets. Protection against unique export risks, as well as leveraging the insurer’s market knowledge, allow you to make better decisions on where to grow.
- Enhance the efficiency of your in-house credit team by tapping into the deep resources of a credit insurer. Your credit team will be making informed decisions about customers, rather than educated guesses.
- Manage your A/R concentration risk. Receivables concentrated in a few large accounts would normally put the reliability of your company’s results at risk. Credit insurance mitigates that risk.
- Enhance your customer relationships and be more competitive by safely raising credit limits or offering better terms. Actively supporting growing relationships sends a positive signal to your customers.
- Sleep better at night knowing your risks are covered and your payments are guaranteed. Not that CFOs sleep that well, anyway…
A credit insurance policy, if used properly, provides a valuable extension to a company’s credit management practices. It provides a second pair of objective eyes when approving buyers, as well as an early-warning system if exposure is increasing. Lastly, credit insurance helps the CFO ensure that there are no surprises in reported results. Because nobody hates surprises more than the CFO.
Click here to learn more about how you can protect your accounts receivable and get a complimentary credit risk assessment on two key buyers of your choice.