Learn what accounts receivable is, how accounts receivable insurance works, and how to make it work for you.
Accounts receivable insurance – sometimes called A/R insurance or trade credit insurance – provides companies with protection against customers that fail to pay what they owe by securing their accounts receivable.
Well known and widely used by European companies for decades, accounts receivable insurance is now becoming more commonplace among companies of varying sizes based in North America as well.
The reason for this growth is that, on average, accounts receivable typically make up 40% of a company’s assets. As a result, there is a greater chance that a business will experience a loss within its accounts receivable than any other asset, especially with past-due invoices and non-payment events being so common.
Accounts receivables are a critical component of your balance sheet — they directly affect your cash flow and profitability. Many companies in the U.S. are thorough when it comes to protecting against losses related to property damage, liability, and other unpredictable, high-exposure risks.
However, these same organizations often fail to view accounts receivable as one of the most valuable assets that can and should be secured – leaving themselves exposed to cash flow and revenue problems . There is a safer way to do business.
Once implemented, accounts receivable (A/R) insurance coverage can help credit risk teams and other stakeholders manage the commercial and political risks that are beyond the organization’s control.
Click below to learn how much trade credit insurance costs your business and help it can help you grow with confidence.
Accounts receivable insurance is designed to protect your business from non-payment of commercial debt. That means that if a customer does not pay you because they go bankrupt or insolvent , or if they simply do not pay on time, an accounts receivable insurance policy will pay you up to the insured credit limit. Accounts receivable coverage helps you protect your capital, maintain your cash flow and secure your earnings while extending your competitive credit terms and helping you access more attractive financing.
There are four types of accounts receivable insurance:
From the definition of accounts receivable insurance presented above, you know that this tool helps companies protect themselves against non-payment risks and maintain their balance sheets.
However, while your accounts receivable coverage policy is a shield, it can also act as a sword to help you grow sales and obtain better financing terms.
An accounts receivable insurance policy allows companies to feel secure in extending more credit to current customers, or to pursue new, larger customers that would have otherwise seemed too risky. The protection it provides allows a company to increase sales to grow their business.
Insured companies can sell on open account terms where they may have previously been restrictive or only sold on a secured basis.
“Accounts receivable insurance has allowed us to take on customers and transactions we wouldn’t have felt comfortable taking on by ourselves,” commented Mike Libasci, President of International Fleet Sales, in our case study, Reducing Concentration Risk Helped Drive Growth. “It has not only allowed my company to take on larger deals, but be more liberal in terms, and the result has gone straight to our bottom line.”
With access to extensive knowledge about the creditworthiness of new and existing customers, companies with accounts receivable insurance can prevent losses. Companies can improve their internal procedures , make credit decisions quickly, and gain a major competitive advantage by extending more attractive offers to customers and prospects. Overall, this allows companies to sell more in foreign markets which means more revenue opportunities.
“This is a fast-paced business, and companies want an answer quickly. If you wait days or weeks, a deal can be gone,” said Ori Ben-Amotz, Chief Financial Officer of Hadco in An Efficient Credit Management Process Accelerates Business Growth. “We were not able to make quality decisions, especially under pressure. We were over conservative and held back limits.
“With [accounts receivable] insurance, we don’t have to ask for cash up front or payment on delivery, which makes us much more competitive. This is the tool we needed to take more market share from our competitors.”
Banks typically limit what you can borrow based on the perceived risk of international receivables, concentration of sales to large customers, or age of certain accounts.
When your domestic and international receivables are covered by an accounts receivable insurance policy, you may be able to borrow more — often at more favorable rates.
Download the A/R E-Book to uncover how Allianz Trade can help your business protect its assets and grow with confidence.
Once your partnership begins, the insurance provider analyzes the creditworthiness and financial stability of your insurable customers.
In the case of Allianz Trade, buyer and country risk evaluations are aggregated into a proprietary risk grade. This risk grade is informed by data from more than 85 million companies monitored in our database, the local insights from our presence in 52 countries, and the nearly $1 trillion in trade transactions we cover globally.
With this information, our underwriters are able to forecast the probability of default and assign specific credit limits to your customers.
Throughout the life of the policy, the A/R insurance policyholder may request additional coverage on a specific buyer should that need arise.
The insurer will investigate the risk of increasing the coverage and will either approve the additional coverage, or provide a detailed explanation about why the existing limit must be maintained. Similarly, policyholders may request coverage on a new buyer with which they’d like to do business. Allianz Trade receives over 20,000 credit limit requests every day and processes 85% of them in less than 48 hours.
Customers’ creditworthiness can change throughout the year, so the insurer must consistently monitor policyholders’ buyers.
At Allianz Trade, we invest heavily in the development of proprietary credit and financial information, and employ risk analysts as well as industry- and country-based underwriters in many geographic locations in order to have a close physical presence to our customers’ buyers.
Our team analyzes payment information about policyholders’ buyers to identify early signs of financial trouble to ensure early intervention is initiated.
This allows the companies we insure to make more informed decisions about how much credit to extend to their customers. More importantly, it enables companies to avoid accounts receivable losses through the close monitoring of their customers.
With accounts receivable insurance coverage, the policyholder’s credit management team can be enhanced by the thousands of professionals associated with these carriers; your credit insurer essentially becomes an extension of your team.
