Minimizing Risks and Disruptions: What Is Bankruptcy Insurance?

Imagine what your company could do with the right protections in place. Not only could you take on greater risks, but you won't have to worry about major setbacks from contingencies. Without proper bankruptcy insurance, your company could be one of the 20% of small businesses that fail each year.

Contingencies can arise at any time, and it's essential to have the right coverage. While this might seem like an overwhelming obligation at first, it's easier to handle than most people think. Let's explore the key information you need to know.

What Is Bankruptcy Insurance?

Also known as trade credit insurance, bankruptcy insurance mitigates your company's risk by compensating you for unpaid debts within your coverage's limits. For example, let's assume your policy offers $100,000 in compensation.

Your clients' unpaid invoices amount to $80,000. You'd be able to receive compensation for this amount. If the unpaid invoices totaled $150,000, though, you'd only receive $100,000 in compensation.

With this protection in place, your company can operate and scale more easily. It's not uncommon for businesses to improve their performance exponentially once they implement a bankruptcy insurance policy. All it takes is for a few major clients to delay their payments for you to experience financial distress.

Who Should Get It?

Companies of all sizes use bankruptcy insurance, and there's no specific size your business needs to be. These policies are ideal for those who have issues with clients paying late or refusing to pay.

Companies that offer lines of credit to their clients can also benefit from bankruptcy insurance. While your company likely has policies for its credit lines that can protect it, there's no guarantee your clients will follow them appropriately. You should always stay prepared for this situation, and bankruptcy insurance is a robust safeguard you can implement.

What Impacts Policy Cost?

As you might expect, your company's overall risk will have a large impact on how much your policy costs. Other criteria the insurance provider will consider include the total volume of trades, your company's industry, and your clients' creditworthiness.

For example, let's assume you operate in a high-risk industry (such as construction) and complete a large number of projects each year. There's a good chance your policy would cost substantially more than that of an eCommerce business.

It's often possible to scale your coverage to fit your current risk profile. To clarify, you might have seasonal clients that are a higher risk to your company than others. During the periods you do business with them, you can increase your insurance policy's limit.

How to Manage Risk

There are steps you can take toward risk management that can help you lower your policy's cost. Simple modifications can go a long way toward making improvements. Let's explore the key information you need to keep in mind.

Minimize Your Unpaid Debt

The better you handle your accounts receivable, the less likely your clients will be to pay late or not pay at all. By extension, your policy won't come into effect. When your insurance provider doesn't anticipate having to make regular payouts, they'll assess your company as having a lower level of risk.

Set Clear Payment Terms

It can be difficult to define late or missed payments if you don't establish clear payment terms. It's also a good idea to ensure your clients fully understand your terms before moving forward with your company.

This will clear up potential ambiguity and minimize the chance of issues occurring. Make sure your clients can access these terms when necessary in case they need to reference them.

Track Your Invoices

Always track the invoices you send to your clients. You can remind them when it's time to pay so you can avoid late payments.

If you regularly deal with large amounts of invoices, invoice tracking software will provide insight into invoices that are pending, paid, and unpaid. You can then prioritize invoices with upcoming or past due dates. Keep in mind that you may need to be flexible with certain clients to get your money.

Vet Your Clients

As previously mentioned, your clients' creditworthiness will impact what you pay for your policy. Vetting your clients will allow you to avoid working with people with a poor credit history. You could amend your business policy to only accept clients who meet certain criteria.

Some entrepreneurs overlook this obligation out of fear it'll take longer to find new clients. However, it's worth taking the extra time so you can achieve better long-term results.

Finding Bankruptcy Insurance

Not all providers are created equal, so it's imperative to do your due diligence. This will help you avoid issues you may have otherwise dealt with. See what others have to say about their past reputation online so you can narrow down your options.

Look for feedback that mentions professionalism, communicativeness, and overall results. However, it's imperative to look for fake reviews when browsing insurance providers.

Otherwise, you could encounter major issues after signing an agreement. These are also posted in large batches and contain many of the same keywords.

Do they have a strong customer support policy? If problems arise and you can't get the help you need, you could experience unnecessary obstacles.

Imagine a scenario where you had issues filing a claim to receive compensation. This might result in significant downtime. As long as you remain vigilant, you shouldn't have issues finding the best choice for your situation.

Take Action ASAP

Once you determine how bankruptcy insurance can benefit your business, you should take action as soon as possible. This will minimize the risks you face and help keep your company protected. Just be sure to research the provider you choose.

ARI Global prides itself on representing our clients' interests and not those of insurance companies. We do so at no extra cost to you.

You'll work directly with an ARI broker and not a call center, allowing your business to get the personalized attention it needs. You can learn more about the many benefits we offer when you get a free quote today.