Credit Insurance

You have many risks to assess within your business operations. One of them is the possibility that a customer will default on “receivables” due to you. In some cases this could be only a minor setback. But if the receivable is substantial, a non-payment could threaten your business.
One solution to this concern is accounts receivable insurance. This coverage can be especially helpful for businesses that want to pay small amounts incrementally to cover large risks that could threaten the stability of the company.
 
Consider These Facts
  • Insurance companies that provide accounts receivable insurance differ in how they write this coverage; Sometimes it is called credit insurance and covers bad credit risks. Sometimes accounts receivable insurance only covers accounts receivables records destroyed in a “covered peril,” such as fire.
  • Obtaining credit insurance on your key customers will enhance your own credit worthiness.
  • A credit insurance company can act as an unpaid credit analyst on your behalf.
 
How Does Credit Insurance Work?
When you approach a credit insurance company to cover your risk of having an non-collectable receivable, they will want the following information:
  • Complete information on your company and your industry
  • A history of all your past bad debt write-offs
  • A list of all your outstanding receivables
  • A list of the customers whose receivables you wish to insure
  • Those customers’ payment history, outstanding balance and the maximum limit you wish to insure on each
The reason the insurer needs a list of all your receivables is to be sure that you are not “cherry picking” your accounts by trying to insure only the least credit worthy of your customers. Once this information is available, the carrier will examine the credit history of all the accounts you want to insure and choose whether to offer you the coverage.
This is a very specialized and complicated area of insurance. It is important that you work with a knowledgeable person who can help you compare accounts receivable insurance quotes and coverage from several different insurance companies and find the right coverage for your needs and budget.
 
Important Credit Insurance Considerations
An accounts receivable insurance policy is designed to remove as much of the ordinary risk of an unexpected bad debt as possible.
It is not a method for reassigning bad accounts to someone else. Nor is it a reason to grant credit to customers you have reason to believe are not fully credit-worthy.
The following are some important considerations:
  • Insurance companies must underwrite and approve every new customer added to a policy.
  • Remember that you will share in every loss because of the deductible and coinsurance features of the policy, so choose the clients you will work with on credit wisely.
  • The insurer’s underwriting work (addition of each client to the coverage under your policy) can work as an additional tool for your business. If a carrier refuses to accept a new customer, it is a warning to you not to do business with that customer, or to limit your granting of credit. Think of your accounts receivable insurer as your credit department.
 
Credit Insurance Benefits
You will experience a number of benefits by establishing an accounts receivable insurance program. This coverage:
  • Enables you to grant more credit to more customers than you might otherwise
  • Eliminates the chance of a large, unexpected default negatively impacting your business
  • Provides a cost-effective method of doing an expert credit check on each customer
  • Enhances your own credit worthiness and borrowing power; specifically, if you borrow against your receivables to generate more working capital, you will leverage the amount you can access
Accounts receivable insurance is a great tool for a small to mid-sized business. In most cases it will pay for itself after accounting for all the benefits.
Evaluating Accounts Receivable Insurance Offers
There is no such thing as a standard accounts receivable insurance policy. Every insurance company has its own wording and provisions. Key elements in any policy are:
  • How the policy defines a loss
  • How and when to file a claim
  • A definition of insolvency or bankruptcy
  • Losses denominated in a foreign currency (if you have that coverage)
  • How the policy handles partial billings on work in progress
  • How you and your insurance company share collection expenses
  • How the policy allocates receivable recoveries
Before committing to a carrier and a specific accounts receivable insurance policy, you should ask for a sample policy and review it. When you experience a loss is not the time to discover that your policy has a provision that works against you.

 

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