Trade Credit insurance is a product that can both save a business money and make a business money. The financial savings are not only measured in the reduction in bad debt reserves, which are not tax deductible, while credit insurance premiums are, and the impact that has on a company’s capital position but against the alternatives to insuring your accounts receivables. Two alternatives, self-insurance or factoring, have costs associated with them. Whether it is the investment in credit resources systems and information, the impact of capital allocations on your financial statement or margin erosion trade credit insurance is cost competitive.
Indemnification and minimization of non-payment losses provides additional savings as well over a longer term. Many businesses view their existing customers credit strength based on a micro point of view-If they are paying me on time they must be doing OK. Often the trade creditor is the last to know. A distressed business knows that trade credit is their cheapest and in many cases only source of credit. They must keep up the facade that all is well by paying their bills until they can’t. Then they very quickly fall off the credit cliff. The suddenness of the fall can even increase your potential exposure above your established credit limits. Returned checks and preferential payment exposure are just two ways the balance can increase beyond the accounts receivable on the books.
Trade Credit Insurance companies incorporate the information, both positive and negative, from their policyholders with other public and proprietary information. This additional information can include financial data, industry trends, and recent payment history. The breadth of this information, much greater than an individual business can cost effectively acquire, provides a much greater macro perspective. This view allows the risk analysts to see potential trouble well in advance of individual creditors. This long-range outlook gives companies an edge in dealing with the customers, provides time to reduce the credit exposure and minimize potential losses.
Both operationally and through risk mitigation Trade Credit Insurance can be used as an expense reduction tool for businesses of all sizes.