The tradeoff between trying to make more sales and trying to sell to customers who will pay is well known. Those companies who operate with loose credit policies often generate more sales and revenue. However, when it comes time to collect, companies who offer credit to anyone really struggle. On the other hand those companies who choose to sell only to high-credit customers often collect the money, but they don’t make as many sales.
What is a company to do? Generate more sales, or collect a higher percentage of them? There is another option: accounts receivable insurance.
(AR) Account receivable insurance consists of paying an insurance provider a premium in exchange for them insuring your accounts receivables. Just as with health insurance, there are a myriad of different types of AR insurance. The insurance company will work out the details with each individual company it services. Here is a general example of how AR insurance or trade credit insurance works:
Steve’s Car Shop has decided it wants to really boost revenues this year so the company is going to sell to customers with a bad credit history. Steve realizes that some of these customers are probably not going to make the payments or they will make them late. Steve decides that insuring your accounts receivables with accounts receivable insurance is a good idea. The insurance company works out a deal with him and if the customers don’t pay and the insurance terms are met, the insurance company will pay what is owed to Steve’s Car Shop.
Why Would a Company want AR Insurance?
Expansion into newer markets is the number one reason to insure your accounts receivable. Note that this doesn’t only mean expanding to low credit customers. It can also mean opening up operations overseas, especially in developing countries where the political risk is highest.
Some companies have an allowance or cash reserve on hand for bad debts. If your receivables are insured, then this can free up that allowance and the cash can be used for business operations. Of course you’ll need to weigh the benefits received against the cost of the insurance.
One other positive externality of having your receivables insured is that banks may give you better credit terms on loans. In some cases, they will be willing to lower the interest rate because they see that you are all but guaranteed to collect from your customers.
So AR Insurance sounds great, what is the cost?
The cost of trade credit insurance varies depending on the industry, location, and history of your business. If the industry is famous for its high risk, then you can bet that your premium will be higher. If the operations are overseas the premium goes higher. If the operations are in a high risk country overseas, the premium goes even higher. Insurance companies will also look at your current customers’ past payment history. If your customers usually make their payments on time, then the premium will be lower. Insurance companies are run by clever people, you can guess that they will look at all of these factors and more when determining how much your accounts receivable premium will be.
That being said, allow us to give you some general numbers so you can at least perform some back of the envelope calculations to see if it is even worth considering AR insurance. Per $100 of domestic sales the premium is usually somewhere in between $.10 to $.20. Per $100 of international sales the premium is usually around $.25 to $.50. Hopefully this gives you enough information to consider whether or not to contact an AR Insurance Company.
For your convenience, we provide a AR insurance companies below.
Global Commercial Credit: http://www.gccrisk.com/about_global.htm
Global Commercial credit is a fast growing credit insurance company within the United States.
Accountsreceivableinsurance.net
A great site for being put in touch with brokers who can hash out any tough questions you have about AR insurance.
Euler Hermes: http://www.eulerhermes.us
Euler has a great website with lots of information about credit insurance. They can also put you in touch with companies that provide insurance for trade.
Atradius: http://www.atradius.us/
If you want to skip the brokers and interact with a company that actually sells AR insurance, then visit atradius.
