Credit Managers frequently have questions about how to mitigate trade credit risk when traditional credit insurance is not possible; for example, if you are concerned with just one single major customer, or have a customer that is already in financial distress. You can sleep better knowing that you can protect your most significant credit exposures from bankruptcies. Accounts Receivable “Puts” may be able to accomplish that, even if the customer is already in financial distress.
Puts can provide credit protection to cover your substantial credit risks with public companies, or large private companies if they have publicly traded debt, often even if they are already having financial problems. This protection can cover amounts from $500,000 (a practical minimum) up to $100 Million, for one to five years.
In a typical scenario, you would pay a fixed basis-points per month of protection, for the amount you wish to protect. If you are buying, say, $1 million of protection for twelve months, which enables you to turn that over every 60 days for a total of $6 million of sales, this method can be advantageous in allowing you to increase your revenues.
The Accounts Receivable Put is an alternative to credit insurance and factoring and is a solution to the enormous risk you may not be able to cover otherwise. The Receivable Put provides a creditor with 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. Also, the Receivable Put can be customized to meet a client’s unique needs, including the length of term.
Accounts Receivable Puts are an essential tool to have in the credit manager’s your toolbox. If you need some help or direction, let us know.