Credit Insurance as Part of a Risk Mitigation Strategy
We believe in using all the tools available to you in order to protect your company’s accounts receivable. In additional to using the superb Credit2B trade credit platform to evaluate credit risks, depending on your circumstances you may also wish to consider trade credit insurance.
If you want to increase international business, or are concerned about protecting against unexpected domestic credit risks, Trade Credit Insurance can be a part of your growth and risk protection strategy.
You will find that different insurers have differing “appetites” for risks in certain industries, or for certain debtors. In the meantime, here is some general information on this subject.
Specialized, licensed credit insurance brokers can guide you through the process, comparing the market, reviewing, and advising on the agreement, and even help you administer the credit insurance policy. We can put you in touch with specialists who can help you with this.
Benefits of Credit Insurance
- Protection against unexpected bad debts and the insolvency of major customers or suppliers.
- Sell more to domestic or foreign customers or offer higher credit limits or longer terms of sale.
- Your banker may be able to increase your borrowing due to the extra layer of protection.
Trade Credit Insurance
A typical credit insurance program is “whole turnover”, requiring that you insure all of your receivables (you can not select only the questionable credits) and you will pay a percentage – often well less than 1% – of all of your trade revenues. The insurance company will still require that you maintain reasonable credit policy and controls and work within their limits. Because of the slim margins in the credit insurance business, credit lines on problem buyers will be restricted.
Factoring is another way to insure your sales, with similar benefits as credit insurance. Factoring also offers invoice collection services, and can be very useful in certain industries.
Single or Distressed Customer Credit Protection: Accounts Receivable “Puts”
A/R Puts can provide credit protection to cover your large credit risks with public companies, or large private companies if they have publicly traded debt, often even if they are already perceived as having financial problems. This protection can cover amounts from $500,000 (practical minimum) up to $100 Million, for up to five years.
The Receivable Put is an established alternative to credit insurance and factoring. The Receivable Put provides companies the ability to “put” their unsecured trade claims to an institutional buyer, generally a large Wall Street investment bank, in the event of a customer bankruptcy or liquidation. In addition, the Receivable Put can be customized to meet a client’s unique needs, including the length of term.
Political Risks Insurance
Political Risks Insurance covers emerging market exposures, and can protect from losses due to arbitrary governmental actions or sovereign (country) defaults. Coverage can include currency inconvertibility, expropriation, political violence, and more. Whether you are manufacturer, trader, lender or equity investor, your coverage can be tailored to meet your specific needs.