December 19, 2017

Interviews with the Experts: Trade Credit Insurance Does More Than Protect Your Cash Flow

Jaki Ferenz

Jaki Ferenz
Vice President

You buy insurance to protect yourself and your business from the effects of a catastrophic event. However, have you considered that it can do more than shelter you from financial loss? Trade Credit Insurance can be utilized as a sales expansion tool. In this edition of Enquire the Expert, we sit down with Jaki Ferenz, Vice President at Avalon Risk Management, to learn about Trade Credit Insurance and the role it can play in growing a company.

Q: In our industry, it is common to provide a service and then bill the customer later. What should a company take into account when extending credit?
A: When you extend credit, you expect to be paid in full and on time. The largest consideration is whether the company has the financial wherewithal to fulfill this obligation.

Q: Why do accounts receivables need to be insured?
A: You want to protect against unexpected losses. You render a service and then expect to be paid, but you never know. You may think that you know your customers, but you are not familiar with the internal workings of their business. Similarly, your longtime customer may seem large and stable, but they can have underlying issues. Let’s say one of your long-term clients has $60,000 in outstanding receivables and are unable to pay you. How does this impact your company’s cash flow? When accounts receivables are insured, companies don’t have to worry about these scenarios.

Q: What is Trade Credit Insurance? And do you think it is valuable for all companies?
A: At its core, Trade Credit Insurance insures receivables based on your customers and the line of credit that you provide to them. If they are slow to pay or fail to pay, the insurer will step in to pay the claim.

Trade Credit Insurance would be beneficial to any company where they provide a service and bill the customer with a due date in the future. When they have debt owed to them, they have exposure. This is especially important for non-asset based companies where accounts receivables make up a large portion of the assets on their balance sheet. Cash is king; so, if they are waiting over 45 days to be paid, then the cash flow can be adversely impacted.

Q: What are the benefits of Trade Credit Insurance?
A: The benefits are four-folds. First, you can sleep better at night knowing that your receivables will be paid and there will not be a distressing loss. If one of your customers doesn’t pay or goes under, your business will not suffer.

Second, banks appreciate companies who have Trade Credit Insurance. They feel safer lending to you because your commercial debt is secured. It also sends a message that you care about managing your risks, which in turn, makes you a lower risk. This gives you more financing options, and often at better rates.

Third, you get comprehensive information to make quicker and more reliable credit decisions. With this product, you can log into the insurer’s customer portal to research potential customers, like a shipper, and instantaneously see where they stand on providing a limit of coverage. If you were to perform this investigation yourself, it would take a lot longer and it would be very arduous when you have to scrutinize multiple sources. The insurer has an extremely large database of financial information on companies and gives you access to this useful information in a centralized location.

Last, you can safely and aggressively build your customer base while having the security that open accounts are insured. The insurer’s data on your customers can inform your decision on whether to extend credit and, if so, for how much. For example, if they have a poor rating for your new customer and will only offer them a low limit, then you should reevaluate whether the deal would be worth the risk. Previously, you had little information other than they want to do business with you. On the other hand, you only wanted to extend a $10,000 credit limit to your customer, but the insurer can extend $50,000. Since the insurer thinks that they are more creditworthy, you have the opportunity to confidently do more business.

Q: Many companies operate on a thin margin and think that they can’t afford Trade Credit Insurance. Is it cost prohibitive?
A: It may seem expensive if you solely think about it from the indemnification stand point. But if you add in the sales expansion perspective, it should pay for itself. With the insurer’s evaluation of credit worthiness, you may give more credit than you would have otherwise. This allows you to take risks more safely, which leads to more business and revenue. You may have been holding back because you were unsure of a customer’s financial stability but when you are insuring it you have confidence that you will be paid.

Q: Are there different coverage options?
A: There are various options available and customers can choose the one that meets their needs. Some companies want to cover their entire book, while others only want to cover their largest or riskiest accounts. Additionally, the policy is dynamic, so they can add new customers as they take on more business.

Q: What excites you most when offering this product to a client?
A: I appreciate how Trade Credit Insurance can prevent someone from going through the hardship of a financial loss. Businesses rely on their invoices being paid in order to operate and pay their employees. If the invoices are not paid, especially if it was a large one, then people’s personal financial well-being are also impacted. Trade Credit Insurance can help keep cash flowing and businesses operating.

I am also excited about the sales expansion potential. When you take away the unknowns of whether to do business with customers, it opens opportunities to provide more services to them. Since they are insurable, businesses can take more risk. In the worst case scenario, the customer defaults and you have to file a claim. The insurer will pay you and collect the debt on your behalf.

Q: Do you have any parting thoughts on Trade Credit Insurance?
A: It is a multi-faceted product and different customers can benefit differently from it. For example, if you are a smaller newer business, you will like the better financing options. If you are a more established company with more capital, you can appreciate the access to extensive financial information about your customers and the peace of mind of knowing that you are insured. This really is a beneficial product that all companies should consider.

To learn more about Trade Credit Insurance and other business insurances, visit Avalon’s website.

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