What’s your business’s greatest underinsured asset?Some businesses might have valuable patents or intellectual property. Others, millions of dollars invested in inventory. And of course talented staff and brilliant leadership. But one asset you might have overlooked is your accounts receivable.
Credit risk insurance has four main benefits, each of which can justify the cost of premiums on its own.
- Catastrophic loss protection: For most businesses, the top 20 percent of accounts represent about 80 percent of the company’s revenue. This credit exposure means that just one sudden, unexpected loss could devastate many businesses.Credit insurance mitigates this catastrophic risk. It offers a cost-effective way to prevent this business nightmare, but it can also be a custom-tailored financial tool that helps businesses and organizations achieve other financial goals.
- Safer sales expansion: Customers both old and new often request large amounts of credit as a condition for their purchases. Many vendors limit their sales to avoid taking on too much credit risk. For a small percentage of the deal, credit risk insurance can allow these companies to expand sales and be sure they will be paid. In today’s global economy, credit risk insurance also allows businesses greater opportunity to expand abroad.
- Improved credit decisions: Credit risk underwriters generally conduct credit evaluations on the accounts you wish to insure and approve them for specific credit limits. Their detailed analysis represents a highly professional evaluation of your customers’ creditworthiness that you can use to make better decisions about clients. In addition, credit risk underwriters continually monitor accounts, ensuring that you get early indications of any changes to their creditworthiness.
- If the company borrows against its receivables, credit risk insurance lowers the risk for the lender. Lenders might therefore lower their rates, increase the volume of available funding or allow previously unsuitable accounts into the borrowing base.
Credit risk insurance is tailored to each individual business and its clients. Therefore it’s important to find a broker or agent who is experienced in this field and who displays a genuine interest in understanding your business operations to get you the policy most suited to your needs.
Before you talk to a specialist in this field, you should take a look at your business. What is the nature of your customer base, how robust are your credit practices, what is your appetite for risk and how aggressively do you want to expand? Think about how you want the policy to work for you and where it can bring value. With this accomplished, you’ll be better prepared to have a productive dialog with a specialist who can help you find the ideal solution.
Of course you will want to discuss what type and level of risk you wish to cover. But you will also have to decide the level of premium you can afford and the amount of risk you wish to retain via a deductible or co-payment. You can use a deductible to reduce premium; generally, it is sound practice to make sure the deductible is less than your gross margin. You can maintain a small reserve to cover the deductible or take it out of your cash flow at the time of the first loss.
Another golden rule is to submit all your accounts for underwriting and let the professionals decide the specific coverage for each account. This is important because a credit risk policy is designed to protect against unexpected losses—and that includes those accounts that you’ve never experienced problems with. A broker or agent will also be an invaluable resource for evaluating the different proposals you receive.
Carriers all differ widely in how they structure and administer their policies. The three key variables to focus on are the carriers’ financial strength, their contract wording and the policy terms and coverages they propose. Keep all these factors in mind when comparing premiums and deductibles to get the right policy to help move your business forward.