Quest News™

July 29, 2015

The Power of Credit Insurance


In 2014, more than 26,000 U.S. businesses filed for bankruptcy. Is your company at risk of being a statistic in the event it experiences a default or suffers from the domino effect when your buyers’ customers fail to pay? Accounts receivable can represent up to 40% of a company’s assets and yet, despite this asset’s vulnerability to loss from non-payment, it is most often left uninsured.

As of May 2013, the average past due rate for invoices in the U.S. was 18.29% according to Cortera Research. After three months, an average of 26% of these accounts become uncollectable and by twelve months, the lost percentage rises to 90%. Causes of non-payment abound – insolvency, supply chain disruption, or unexpected cash flow interruptions to name a few – but excuses for late payment or default won’t balance your accounting. Worse yet, a severe bad debt loss can sink your company. Credit insurance covers losses from past-due and uncollectible receivables like these, whether due to slow payment, bankruptcy, political risk, or other unexpected events. But the power of credit insurance goes so much further beyond simple loss protection.

Credit insurance can empower your company to expand your market reach, allowing you to safely sell on open terms to new clients, including foreign companies. Selling to companies in countries that are going through economic or political changes is a risky bet when using unprotected credit terms. The use of credit insurance can often mitigate the risk of working with companies in areas that have heightened liabilities.

The protection of your receivables can also have a large and positive impact on your business operations. Beyond seizing growth opportunities with new customers, you can increase revenue with existing customers by offering them higher credit limits, secured in the knowledge that if they don’t pay, your credit insurer will.

Insuring your receivables can also benefit your working capital. Banks will typically offer higher lines of credit, often at more favorable terms, because your insured accounts can be used as a stronger form of collateral.

Factoring debt, the practice of selling invoices to another company, is an option some companies use to acquire instant capital. When debts are credit insured, it is easier to factor your debt quickly and at a higher value. For companies that factor strictly for the protection benefit rather than cash flow, credit insurance can actually be a much more cost effective alternative.

The benefits of credit insurance are far reaching, but at its core, it ensures you maintain the cash flow and profitability you need to continue doing business. For more information on credit insurance, contact an Avalon representative or download our handout on credit insurance.

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