This week’s guest blog is from one of our exhibitors, Chaser. A chaser for accounts receivable, they speak about the importance of accounts receivable insurance:
What is accounts receivable insurance?
Accounts receivable insurance, often referred to as trade credit insurance or debtor insurance, is a financial product designed to protect businesses.
It safeguards you against losses from customers failing to pay their invoices.
If your customer becomes bankrupt or simply doesn’t pay, accounts receivable insurance provides a safety net.
This insurance covers unpaid invoices up to a specified credit limit, helping you maintain cash flow even when clients default.
When you extend credit to clients, there’s always the risk they won’t pay. This can happen due to insolvency or financial troubles.
A/R insurance thus helps manage these risks, allowing you to focus more on growing your business.
Some policies also offer additional support like debt collection services.
These services can help you recover money owed more efficiently, saving you time and resources.
If you’re exploring strategies to better manage credit risk, choosing the best accounts receivable software can complement your insurance plan by improving receivables tracking and management.
By having this type of insurance, you can have greater confidence in offering credit to your customers.
It can be crucial to your business’s financial strategy, providing stability and security.
How does the insurance for accounts receivable work?
Accounts receivable insurance, also known as insurance on accounts receivable or AR in insurance, helps protect your business from financial losses when customers cannot pay their debts.
This type of insurance provides a safety net against non-payment, ensuring your cash flow remains stable even if customers default on payments.
The process begins when you partner with an insurance provider. They assess the creditworthiness and financial health of your customers.
This assessment helps determine the risk level and the coverage amount for your business.
Providers use various data sources to evaluate this risk, often relying on information from millions of businesses worldwide.
Once you have signed up for the policy, your insurer covers a portion of the financial loss if a customer does not pay you. This might happen due to insolvency, bankruptcy, or other financial difficulties.
7 Benefits of having the accounts receivable insurance coverage
1. Improved cash flow
Cash flow is essential for any business. With accounts receivable insurance coverage, you’re protected if customers fail to pay invoices.
This coverage ensures that your cash flow remains steady.
For example, if a client defaults on a large payment, your insurance will cover it, helping you avoid cash shortages.
With stable cash flow, you can confidently invest in growth opportunities.
This financial security allows you to plan and budget effectively without fearing unexpected financial gaps due to unpaid invoices.
2. Reduced credit risk
When you have accounts receivable insurance, you lower the risk of customer non-payment.
Insurers assess the creditworthiness of your customers. This can inform you about customers who might pose a risk.
It’s a safety measure that protects your business from potential financial losses.
For instance, knowing a customer’s payment risk lets you make informed decisions about extending credit or adjusting payment terms to minimise risk.
This proactive approach helps in maintaining the health of your receivables.
3. Easier access to financing
Banks view businesses with accounts receivable insurance as more reliable borrowers.
This insurance acts like a guarantee that you will receive payments.
Lenders may be more inclined to offer favourable loan terms.
For example, securing a loan or line of credit becomes easier and possibly more affordable.
Your business, therefore, gains access to needed funds for expansion or operations, with lenders seeing less risk due to your insured receivables.
4. Enhanced customer relations
By providing trade credit backed with accounts receivable insurance, you offer more flexible payment terms to customers.
Customers appreciate this flexibility, strengthening your business relationships.
It shows you trust them while protecting your financial interests.
This insured trading relationship allows you to increase sales and customer loyalty.
It demonstrates confidence in your business arrangement, fostering a healthy partnership.
5. Protection against economic instability
Economic fluctuations can affect your customers’ ability to pay.
Accounts receivable insurance stands as a safeguard against uncertainties like recession or market downturns.
This protection helps your business stay resilient amidst economic challenges.
As an example, during an economic slump, if your clients struggle financially, your insurance helps buffer these risks, preventing potential negative impacts on your finances.
6. Improved business planning
Knowing your receivables are covered, you can plan and operate with greater confidence.
Accounts receivable insurance supports strategic planning.
You can focus on growth without worrying about late or missed customer payments.
For instance, predictable income from insured receivables means you can allocate resources effectively, pursuing new ventures or increasing inventory with reduced financial risk.
7. Increased global trade opportunities
Expanding internationally involves various risks, especially related to payment.
Accounts receivable insurance mitigates these risks, making it safer to extend credit to foreign customers.
If you’re considering global expansion, another useful financial tool is accounts receivable factoring.
Factoring can help improve liquidity by selling outstanding invoices, which, combined with insurance, provides comprehensive cash flow security.
What Does The Receivables Insurance Usually Cover?
Protection against non-payment
Receivables insurance, sometimes called debtor insurance, safeguards you against the risk of customers failing to pay.
If a customer becomes insolvent or bankrupt, the insurance helps cover the owed amount.
This ensures a steady cash flow even when customers default on payments.
For example, if you are selling products internationally and a buyer in another country goes bankrupt, the policy can help recover your unpaid funds.
Loss of accounts receivable records
The accounts receivable coverage form often includes protection against the loss or damage of your receivable records.
If important financial documents are lost due to reasons like theft or natural disasters, this insurance can help with the recovery costs.
For instance, hiring a data recovery firm to restore lost accounts can be quite expensive. The insurance can cover these costs, minimising financial disruption to your business operations.
Customised risk coverage
Some policies allow you to tailor coverage to suit your specific needs and risk levels.
For businesses operating in volatile industries, customised protection can be essential.
This flexibility helps address unique risks your business might face.
Take, for example, a company in the oil industry, which is prone to economic fluctuations. Customised coverage can cater to specific regional risks or particular high-value customers, ensuring you are adequately protected.
Political risk coverage
In some cases, receivables insurance will offer protection against political risks.
This is especially relevant for businesses involved in international trade.
Political events can affect a buyer’s ability to pay, and this coverage can mitigate those risks.
Imagine you’re trading with a company in a country facing political unrest. The insurance can cover potential losses due to government actions or trade embargoes, providing peace of mind and financial security.
Learn more about accounts receivable here: https://www.chaserhq.com/
