Businesses trading on credit terms have substantial amounts of working capital tied up in accounts receivable, which can be risky if customers can’t or won’t pay on time. Credit insurance protects cashflow by ensuring accounts receivable are covered when customers don’t pay.
Mark Hoppe, managing director of Atradius ANZ said, “It is important to safeguard cashflow from bad debt, which can damage profitability and business-supplier relationships. Credit insurers follow up bad debts on the business’s behalf and cover losses.”
There are five key ways credit insurance can protect businesses’ cashflow:
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Loss recovery
Credit insurers can provide debt collection services. Organisations in Asia Pacific lose, on average, 50 per cent of the total value of their trade receivables that aren’t paid within 90 days of the due date[1].
Mark Hoppe said, “There are many reasons a customer can’t pay on time or at all. Some reasons are beyond the customer’s control like political and natural disasters, but failing to collect these funds can damage cashflow. A credit insurance policy can cover for these losses and protect the cashflow.”
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Early warning
Organisations with credit insurance can receive early warning of potential payment difficulties. Credit insurers can provide access to credit information on companies operating worldwide, and can evaluate the risks of working with new businesses so they can limit unnecessary trading risks.
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Fit for purpose cover
Credit insurance policies cover goods and services sold and delivered, and can be tailored to cover many risks, like work in progress and binding contracts.
Mark Hoppe said, “Credit insurers can provide flexible cover options that let organisations match the policy to the business requirements. The cost of this cover can be very affordable.”
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Enhanced credit management
Credit management cannot guarantee bad debt prevention, while credit insurance enhances and strengthens credit management processes to protect cashflow.
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Liquid funds
Insufficient liquidity can stunt business growth. Credit insurers can provide liquid funds, increasing cashflow through the business.
[1] Atradius Payment Practices Barometer for Asia Pacific, 2014.
