Extending credit to customers can be a risky move, but only if you’re not putting the proper safeguards in place to ensure your cash flow will be taken care of properly. It also has great pay offs in increasing the number of customers you can work with and allowing for larger sales to occur. So, the big question is what tools you can use to make sure you are extending credit without the large risk factor? One great tool to use is trade credit insurance.
WHAT IS TRADE CREDIT INSURANCE?
When a company has receivables and invoices, trade credit insurance protects the business from the possibility of non-payment. The company will take out a policy for trade credit insurance which usually will cover the business on 75%-95% of the invoice amount. When an invoice goes unpaid and the customer is refusing to make a payment, the company can file the non-payment with the insurance company to collect on the invoice amount. Usually, trade credit insurance won’t cover disputed accounts, so it’s important to keep processes in place to eliminate or greatly reduce the number of disputes occurring in the accounts receivable department. Investing in a trade credit insurance policy allows companies to extend more credit to customers and pursue larger deals to help grow their business.
Below are common reasons companies choose to invest in trade credit insurance.
When companies are using trade credit insurance, there is less to stress about when adding new customers. Although potential customers should still be properly vetted, those who may have been considered too risky are now eligible for a line of credit. The sales department is also able to offer larger lines of credit knowing that it will be covered by the trade credit insurance.
Instead of keeping all your money in bad debt reserves in the chance that a customer will not make payment or go bankrupt, you can use that money to invest more in your company and grow. An added bonus is trade credit insurance is tax deductible, while bad debt reserves are not.
PROTECTION AGAINST NON-PAYMENT
It’s not always made known when a company is going to file for bankruptcy. Consider if this is one of the larger accounts your company does business with. This could be catastrophic for your company if you don’t have any security net to fall back on. However, with trade credit insurance you can be sure that all outstanding invoices from that company will be paid on.