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Businesses are comfortable with the idea of purchasing insurance to provide financial relief in the event their insured assets are lost, stolen, damaged or destroyed. Insurance on real and business property, cash and financial assets, vehicles, equipment, supplies and inventory is all common and routine.
Here’s something else to think about, though. For most businesses accounts receivable are one of their largest assets, and one of the most vulnerable to unexpected loss. Yet while businesses have long understood the need to insure against unexpected loss to other types of assets, few think to insure accounts receivable. It’s worth taking another look at this; accounts receivable insurance, more accurately known as trade credit insurance, is an often overlooked type of insurance designed to protect these assets.
Think of all the many reasons why your customers might not pay what they owe you: corporate insolvencies, financial institution changes, shrinking margins, industry consolidation, unexpected economic developments, product liability, cash flow issues, government regulations, natural disasters, fraud…the list is almost endless; there are many reasons for non payment.
Credit insurance pays when your customer cannot, or will not. Properly used it can be an important risk avoidance and risk mitigation tool. There are a number of different types of products in the credit insurance arena that can be customized and structured in such a way as to provide meaningful protection for almost any need. Some examples: you can choose to cover all your customers or just a select few; single accounts, just key accounts or almost any combination. Credit insurance can also be written for domestic or international receivables, or both, and it has particular value for international trade exposures
What can credit insurance do for you? Some of the benefits of a thoughtfully designed program of credit insurance would include:
• Catastrophic loss protection
• Safely increasing sales without increasing credit risk
• Penetrating new and unfamiliar markets, territories and/or industries
• Increasing borrowing rates
• Protecting overseas loans and investments
• Insuring export sales
• Replacing letters of credit
• Insuring against political events
• Gaining access to experts in specific industries and countries
While credit insurance certainly has value in a domestic sales setting, it can also be particularly valuable in international transactions. The world economy has become increasingly internationalized, and many worthwhile business opportunities lie outside U.S. borders; many of these opportunities may be available in some of the more volatile parts of the world. Wherever they are, once you are outside U.S. borders you must deal with laws, customs and business practices you are not familiar with. Political risk can also be a concern. Factors such as war or political violence, social or economic instability, license cancellations, confiscation, expropriation or nationalization, currency fluctuation or contract frustration are among the many risks that might be issues; these are mostly all out of your control, but represent real risks in export sales.
Credit insurance can assist with many of the risks associated with export sales. Export credit insurance is one of the most valuable tools you can consider for protecting and growing international sales; it’s designed to help you serve international markets and customers without undue fear of non-payment. Building political risk cover into a well thought out program of export credit insurance may also allow you to gain business and sell into markets you might otherwise avoid. The coverage is very comprehensive and can be customized to meet your specific financial needs, level of export credit expertise, and geographic market concentrations.
Credit insurance is a highly specialized product, typically offered by providers who specialize only in that. Brokers are as interested as you in avoiding problems, and underwriters, like any insurance company, don’t like to pay claims, so along with the ability to design a highly customized insurance program that fits your specific needs they also will typically offer valuable additional support services and resources and will work with you to avoid pitfalls; this is just another value to this type of insurance. Understanding the creditworthiness of prospective international customers is important, so access to international credit reports offered by credit insurance markets can be valuable. In addition to foreign credit reports, receivables management services, political risk guidance and advice on laws in foreign jurisdictions you may be thinking of entering are just some of the additional support available. And when problems do occur, having expertise available to handle collections outside the U.S. where laws may vary widely is a valuable resource.
If this sounds like something you would like to explore further, give us a call, we’ll be happy to take you to the next step.