Unsure about insurance? Of course you are. Accounts receivables insurance-also known as trade credit insurance-can either be a huge financial drain or the best decision you ever made. To help you decide if it’s right for you, here is a guide to the pros and cons of insuring your accounts receivables:
Decision time: Is Accounts Receivable Insurance Right for Me?
Accounts receivables insurance basics
The premise is simple: commercial insurers protect you against defaults on open accounts. For example, if you have an open account with a customer who suddenly declares bankruptcy, you may find yourself scrambling for those missing funds. Accounts receivables insurance protects you from this and many other potential fallouts, including your customers going out of business, fraud or political or natural disaster. This may sound ideal, but the protection can cost you a pretty penny.
Insuring accounts receivables advantages
Insuring accounts receivables can be a boon for many companies. Some businesses may not have the time nor the resources to perform credit checks on their customers—particularly if they want as many customers as possible. Accounts receivables insurance may be just right for these businesses, says Investopedia, as the customers come with a risk.
Businesses with overseas operations should also look into accounts receivables insurance. Political upheaval and natural disaster can put your accounts in jeopardy. According to BusinessWeek, other overseas business risks include cultural misunderstandings, health perils and corruption. Whatever the upheavals may be, accounts receivables insurance would save you from a heavy blow. Insurance also protects you if your files are ever lost due to an unforeseen circumstance like flood or fire. However, you can offset the risk of losing physical files by using a great accounting software and hosting all of your files on the Internet.
Insuring your accounts receivables may also encourage banks to give you better loan terms. After all, if they see that you are insured, they can trust that you will come up with the funds. As such, insurance may help you get a leg up when starting a business line of credit.
Insuring accounts receivables disadvantages
Companies who would benefit the most from insurance will likely have to pay higher premiums. For example, companies in high-risk industries or businesses that deal internationally will see their premiums increase. You will also be subject to a credit review, in which case the insurance companies will examine your past payment history. Companies whose customers have historically paid late may have a hard time finding reasonable rates. Whatever the rate, the premium will cut into your available working capital, which is essential for any business.
Accounts receivables insurance may not be applicable to all types of businesses, according to a report by the World Bank. For retailers, suppliers that sell solely to the government and suppliers that do not work with open accounts, accounts receivables insurance may not be relevant. This insurance primarily serves suppliers in the business-to-business arena.
How to insure my accounts receivables
If you think accounts receivables insurance is the way to go, you have several options to consider. Popular providers for trade credit insurance include Euler Hermes, Atradius and Coface North America.
You should contact these or another reputable insurer, ask for quotes and seek out the best policy for your small business.