Trade Insurance as a Competitive Advantage
Sounds strange, but a little-known type of protection can help companies grow
Your products, workforce, plant and costs are all essentially the same. Yet somehow your competitors seem to be doing better.
What's their Secret?
Perhaps they’re using a financial tool designed especially for small- and medium-sized businesses that gives them a competitive edge – trade credit insurance.
Trade credit insurance is a way to protect a company’s accounts receivable (A/R). If a customer goes out of business or cannot pay, the insurer is on the hook for the payment, not you. But that’s not all. Your competitors may have discovered that in addition to protecting cash flow, credit insurance also provides significant sales and financial advantages.
Credit risk – the risk that a customer won’t pay what they owe you – is not as common as conventional risks like fire, flood or theft. But a non-payment can be just as devastating. Any economic downturn, like the one we’re experiencing now, weakens companies and leaves millions in unpaid invoices. The result is that struggling companies drag the healthy companies down with them. Could your company survive if one or two of you customers suddenly went bankrupt? It’s little wonder then that companies are discovering credit insurance.
In addition to providing peace of mind, companies that have bought credit insurance have discovered unexpected dividends.
Without having to worry about credit risk, managers can let salespeople be more aggressive and offer customers better terms. Better terms mean bigger sales. Credit terms are especially important for overseas sales. All things being even, the seller providing the better terms is going to get the deal.
Credit Insurance also Gives Users Financial Advantages
For example, many companies use their A/R as collateral to raise capital. Most lenders limit how much credit they will extend against A/R — usually 80%. However, if the A/R is insured, lenders will forward as much as 90% against the very same asset. That’s 10% more working capital.
Here is another example: In most cases, asset-based (AB) lenders will not allow borrowers to use A/R from extended-term sales as an asset. Yet extended terms are normal in overseas sales. However, if the A/R from those extended terms is insured, many AB lenders will accept them as assets.
In both of these cases, companies using credit insurance have gained a significant advantage.
There are other methods companies can use to protect against credit risk. Perhaps the most traditional is debt reserving – building up a cushion of capital in order to survive a sudden shock. Debt reserving does work. But it also ties up your money — money that could be used for working capital and creating more product to sell and borrow against. Credit insurance is more efficient. Moreover, credit insurance is tax deductible. Debt reserving is not.
In addition to the protection it offers, credit insurance provides users with some real advantages. So the next time you wonder why your competitors seem to be doing better than you, the answer may be credit insurance. When used properly, credit insurance is more than just an insurance product. It’s a competitive tool.