By Pascale Hansen

Trade credit insurance is the best kept sales secret in the business world today. Regardless of the size of your business, trade credit insurance helps protect your company from financial loss and can help grow your sales immediately. It’s the insurance policy that will keep you in business.

What is trade credit insurance and who should use it?

Trade credit insurance, also called accounts receivable insurance or simply credit insurance, is a financial tool that manages both commercial and political risks that are beyond a company’s control. Essentially, it provides protection against your customer’s failure to pay its invoices. This can arise because your customer becomes insolvent or because they fail to pay within the agreed upon time frame. Simply put, a credit insurance policy will pay your company when your customer does not.

On average, 40 per cent of a company’s assets are in the form of accounts receivable and in North America it’s often the one asset that is left uninsured.
This is despite the fact that there is a greater chance that a company will experience a loss in accounts receivable than any other asset. A loss that directly affects a company’s cash flow and profitability.

Any company selling to other businesses (B2B) on open account terms (i.e. generating an invoice) can benefit from credit insurance. From small businesses to large, multi-national corporations, a policy solution exists to support business growth and success in almost all industries.

Credit insurance as a sales tool

All insurance policies protect against some risk, however what makes a credit insurance policy unique is that in addition to protecting your accounts receivable risk from slow payments, no payments or your customer’s bankruptcy, it can also be used as a sales tool.

Investing in a trade credit insurance policy allows you to increase sales and profits without additional risk. According to the World Trade Organization, foreign companies buy an average of 40 per cent more when they are offered open terms. This way, a policy can typically offset its own cost many times over, even if the policyholder never makes a claim.

Below I will review how a credit insurance policy can help a company fuel sales growth by freeing up working capital from bad debt reserves, eliminating the need for letters of credit or prepayment, expanding sales into new markets, increasing sales to existing customers and obtaining more working capital.

Freeing up working capital from bad debt reserves

Credit insurance places a ceiling on bad debt losses, allowing you to release a significant portion of your bad debt reserves which can be used to fund sales activities. Typically, if your company makes allowances for bad debt through a reserve, that is usually a dollar for dollar allowance. With credit insurance you could potentially leverage each of those reserved dollars, 100 times or more. For example, if you allocate $100,000 in a bad debt reserve and then write off $100,000, your reserve goes to zero. However, if you spend that same $100,000 or the majority of it, you’re putting your money towards revenue growth while the policy covers any losses.

Eliminating the need for letters of credit

Securing your receivables with credit insurance eliminates the need for letters of credit and payments in advance. Using letters of credit places the burden and cost on your buyer as they have to secure the transaction. Your buyer’s credit line is also blocked for the amount of the letter of credit. This could restrict opportunities for buyers accustomed to dealing on open account terms. By having a credit insurance policy, you invest in securing the transaction and there is no impact on your buyer’s credit line through their bank. This allows you to safely offer open terms and more aggressive credit limits to your buyers worldwide, increasing customer loyalty and sales.

In addition, the ability to offer less restrictive terms with a credit insurance policy in place, gives you a competitive advantage. You may be much more likely to win a business deal as receiving, negotiating and other fees associated with a letter of credit can be expensive for your customer.

Eliminating the need for letters of credit

Economic turbulence, global markets and trade routes are evolving, sometimes gradually, and at other times, with significant volatility. A strong credit insurer helps its clients navigate global trade waters through its up-to-date data from its global network of risk analysts and economists. The knowledge shared with clients comes from three main sources; risk monitoring, experienced risk experts and economic research.

Using this proprietary data will help your company qualify prospects before a sales team starts a sales cycle; this will eliminate any time or money spent selling to a customer who may be a poor payer or on the brink of bankruptcy and therefore more likely to become a problem customer instead of a profitable, long-term customer. Using the credit insurer’s proprietary information to build a solid pipeline of prospects also helps to eliminate the often-heated discussions that can take place between a salesperson eager to close a deal and a stringent credit manager doing their best to minimize the risk of non-payment. If a credit manager is empowered with the data on how large a credit limit can be extended to each prospect before the sales team hits the road, a salesperson will then be able to negotiate on the spot and sign deals faster as s/he will know ahead of time how much credit can be extended safely.

Secondly, experienced risk experts from a global network will be able to provide thorough, local understanding of local business and business culture. Their credit decisions are therefore made in the country where clients’ customers operate and where the risk experts speak the language and understand the business culture of clients’ buyers.

And finally, in-house economists consistently analyze economic and industry sector trends to provide insights that support business needs. A trade credit insurer’ goal and responsibility is to reduce clients’ risk and support clients’ goals of safe, sustainable growth.

Increasing sales to existing customers

A credit insurance policy will make you feel secure in extending more credit to current customers, enabling you to grow your sales without prospecting for new business. If you have been restrictive on your terms or only sold on a secured basis previously, the policy allows you to sell on open terms securely, which will give you the opportunity to increase your sales volume very easily with immediate effect. This can be a major competitive advantage, especially if you are an exporter.

Access to more working capital

If you currently borrow against your accounts receivables, many banks will grant better terms and/or structure with credit insurance in place. Typically, on domestic receivables without a credit insurance policy, a bank will offer an advance rate of 75 per cent. However, when backed by credit insurance, the advance rate can increase to 90 per cent. The extra 15 per cent will give you additional access to funds to reinvest back into your business to grow your bottom line.

With export receivables the benefits are magnified. Banks consider export receivables to be too risky and will not lend on foreign receivables unless they are insured, therefore, your advance rate will go from 0 per cent to 90 per cent. By insuring your export accounts receivable, you maximize the value of this asset. A credit insurer should give you the credit evaluation, protection and account monitoring on your export business, and the ability to leverage the policy to gain additional access to working capital to help fuel your business growth.

As there are increases in insolvencies worldwide, it’s imperative to ensure your company is selling to companies that can pay. In addition, you want to be notified if one of your customers’ risk grade or financial stability is deteriorating. This is especially true if you have a concentration issue and most of your sales are coming from a few customers.

Unpaid invoices can negatively impact the business results of a successful company. Credit insurance ensures that you get paid without wasting time and money navigating the complexity and expense of international debt collection.

Key Points

Insuring your accounts receivable can help you increase your B2B sales revenue by:

• Moving bad debt reserves into cash flow to invest in sales growth
• Eliminating the need for letters of credit

• Finding new qualified customers in domestic or overseas markets

• Increasing credit limits to existing customers

• Obtaining more working capital by using insured accounts receivable as collateral

Pascale Hansen is the Co-founder, CEO and Financial Strategist at Zada.