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Trade Credit Insurance: Protect your accounts receivables in an uncertain economy

Recent economic conditions have heightened concerns that the US could slip back into recession. Europe's struggling recovery and concerns about the Euro contribute to these worries.

Trade receivables are often a business' largest asset. If your customers are unable to pay what they owe you, the potential credit losses can present a substantial threat to your business. There is a solution. Your business can transfer credit risk through trade credit insurance. Trade credit insurance not only protects you against receivable loss but also provides many more benefits.

Regardless of whether you purchase credit insurance, the application process provides valuable feedback from third party professionals on your organization's credit risk.

Hedging against unforeseen debts

The primary benefits of trade credit insurance are:

  • More accurate forecasts of bad debt costs and variability
  • Capping bad debts to avoid any significant one-time losses from a large customer default or deterioration of a specific foreign market or industry segment
  • Hedging against the adverse effects if economy slips back into recession
  • Eliminating the credit and political risk uncertainty of credit sales to higher risk foreign markets.

Other benefits of credit insurance

Applying for credit insurance will not only provide feedback on the quality of your receivables, but will identify other benefits, including:

Improved bank financing: Trade credit insurance can increase margins on receivables and in some cases reduce interest rates. Lenders remain conservative in providing funding - especially to smaller businesses. Credit insurance enhances the bank's primary security and gives them the comfort to increase advance rates to as much as 90% of qualifying receivables. It also mitigates the lender's concern with customer concentration risk. This is especially important for export receivables where banks often provide little or no margining of foreign receivables.

Reduced bad debt allowance: Trade credit insurance brings bad debt allowances back into income so your business can allocate reserves more productively.Self-insurance is an inefficient means to prepare for potential bad debt losses compared to credit insurers who can better spread the credit risk over many clients. Few companies have sufficient reserves to deal with the default of one of their largest customers.

Increased revenue:  Credit insurance can provide the confidence of getting paid in even the most difficult of markets. Letters of credit are an inefficient and expensive means of trading that tie up the operating line of the foreign client. Offering open terms to foreign clients can be a competitive advantage that can contribute to increased revenues.

Leveraged expertise of the credit insurer:  Trade credit insurance can lead to a higher quality customer portfolio and lower overall credit losses.Most underwriters have on-the-ground credit risk underwriting in every major country in the world. This includes the information, systems, people and sophisticated risk management tools of the underwriter to manage and mitigate risk.

A simple process

Credit protection usually takes only the completion of a two-page application, a copy of an electronic aged trial balance and a short discussion to clarify further where credit protection may support key business strategies. After this, your business would receive a management report:

  • Identifying and quantifying the major credit and political risks of the largest customers
  • Outlining the alternative approaches available to mitigate these risks
  • Quantifying the other strategic benefits of alternate credit protection solutions

Getting the most out of your existing credit insurance program

Discuss with your HUB broker how to get the most out of credit insurance, through:

Improving coverage:  When coverage is restricted due to perceived risk, business can pursue alternative forms of one-off coverage. Where information is limited, businesses can directly pursue confidential information on buyers around the world so underwriters can consider the larger limit requirements. Trade credit insurance can be an extension of your credit department to ensure every possibility has been considered to establish coverage.

Claims management:  A broker who specializes in credit insurance and has underwriting experience will best advise clients in qualifying claims. Your HUB advisor can vet claims in advance to ensure they are presented to the underwriter for best results responding to all inspection criteria.

Marketing your program:  A broker who specializes in credit insurance will deal with the seven or eight specialist underwriters on a daily or weekly basis. Your HUB advisor can make sure you are well informed as to the alternatives so that you are well positioned to negotiate your renewal.

Credit insurers are watching the economic developments closely.While coverage has improved and rates have started to soften over the last year, that situation may change suddenly. Discussing your options with your HUB advisor can help you prepare for changes that take place in the future.