Accounts receivable is a critical component of the balance sheet for your business. This is the money you expect to get from your customers after you have delivered the product or service. In fact, this amount comes under the company's assets (current assets). And just like any other asset, you can also insure your accounts receivables with the help of accounts receivable insurance companies.
What is accounts receivable insurance?
Accounts receivable insurance, often known as trade credit insurance, is a business insurance solution that protects your business against the non-payment of invoices.
This type of insurance can protect small and mid-sized organizations from customers who fail to pay their dues on time.
You pay a regular premium to the trade insurance company, like personal insurance. When your customers cannot pay you, the insurance company provides the reimbursement per the insurance coverage and policy terms and conditions.
Trade credit insurance is an effective risk management tool to manage credit risk and non-payment of invoices. The receivable coverage amount helps you maintain the cash flow and bottom line even if your customers fail to pay you.
There can be different types of receivable insurance policies based on the reasons behind the failure of your customers to pay you. For example, they might fail due to financial conditions (bankruptcy or customer insolvency) or even geopolitical conditions in their country (political unrest, war, currency devaluation, etc.).
Sometimes, your business can also suffer damage to receivable records in the event of a fire or property damage because of an accident. The accounts receivable insurance covers the loan interest amount in such scenarios when business owners might need to hire temporary bookkeepers to retrieve records, follow up with customers, and send payment reminders.
Why do you need trade credit insurance? Benefits of accounts receivable insurance
Trade credit insurance is not just a risk mitigation tool. There are multiple benefits of insuring your accounts receivable such as:
Cashflow is the life and blood of any business, especially small businesses and manufacturers. When your customers cannot pay you, it can threaten your business operations severely as it impacts your ability to pay your suppliers and vendors. With the accounts receivable insurance in place, you get paid a guaranteed amount (depending on your policy conditions) even if your customers fail to pay you.
Better terms for customers
Your business gets a tremendous advantage over your competitors if you can offer credit to your customers on lucrative terms. It can be either the credit limit or the timeframe, such as Net 30/Net 60/Net 90 terms that allow your customers to pay in 30/60/90 days, respectively. When you have insurance on your accounts receivables, you can easily extend good trade credit to your customers without any worry about non-payment.
While your customers love credit, there is always an inherent risk of their failure to pay you back on time. It is a matter of how you balance the risk and reward of extending trade credit to your customers. Accounts receivable insurance protects you against unforeseen circumstances and minimizes the risk associated with extending credit to your customers.
Better financing terms from lenders
Financial institutions like banks avoid extending credit to businesses with high accounts receivables. This is because it is a risk for them if you cannot collect outstanding payments from your customers. However, it serves as a safety check when you have insured your accounts receivables. It gives a positive signal to your lenders, making them more open to financing you on favorable terms.
Trade credit insurance proves to be the most beneficial when you plan to expand into other markets. This is especially when the market is in a different country and involves export. Best trade insurance companies not only insure your accounts receivables but also offer your customers expert insights and due diligence. This allows you to acquire new customers and increase sales by giving them the best credit terms without any risk of non-payment of dues.
Cost of accounts receivable insurance
The accounts receivable insurance cost varies from company to company, and typically, it depends on your business's total sales.
Trade credit insurance providers calculate the premium as a fraction, usually $1 to $1.50 per $1,000 of sales.
Some of the other factors that determine your credit insurance policy are:
- Your credit score;
- Your industry, sector, and geographical location;
- Your customers and their creditworthiness;
- Your past history of losses; and
- Amount of coverage
You may need to provide proof of your cash flow, credit score, and the amount of coverage you currently have. If you're in the process of buying a new policy, you may need to provide proof that you have been operating for at least 90 days.
AR insurance is generally affordable, considering an unpaid invoice's potential cost. Depending on your industry, the average loss from bad debt can range from 5-15%. If the average debt on your unpaid invoices is $100,000, you can expect to pay around $15,000 to collect the total amount.
Top accounts receivable insurance companies
Allianz Trade (formerly Euler Hermes)
Allianz Trade is amongst the top trade credit insurance companies in the world. Its headquarters in Paris has 300 offices in 50 countries and more than 100 years of experience.
It offers standard credit insurance, fraud cover protection, and debt collection services. It also issues bonds and guarantees to ensure adherence to contractual obligations.
They focus heavily on the development of proprietary credit and financial information. They monitor more than 85 million companies in their database and source insights from their presence in 52 countries and approximately $1 trillion in trade transactions worldwide.
This enables them to accurately forecast the probability of default and assign specific credit limits to your customers.
Atradius USA boasts the highest ratings by A.M. Best and Moody's. They specialize in trade credit insurance and have 160 offices in 50 countries.
They offer just one policy called Modula, which has different "building blocks." These blocks can be integrated in various ways to form a customized solution for any business.
This one policy approach enables them to offer a standard and transparent policy across markets and languages. On the other hand, the individual modules cater to different risk levels and coverage needs of businesses.
It also provides a secure, free online platform called Atradius Atrium, where users can submit claims, keep track of debtors, manage credit limits, and other credit management processes.
Coface is one of the leading credit insurance companies in the world. It serves more than 40K clients in over 200 countries with the help of more than 4500 employees spread in 67 countries.
It offers various trade credit insurance products like:
- TradeLiner- Comprehensive, customized credit insurance;
- GlobaLiner- Specially designed for multinationals;
- TopLiner- For extra cover for TradeLiner clients to safeguard a particular project/buyer); and
- Single Risk- For different commercial and political risks abroad,
Coface's expert team and underwriters also offer personalized advice and feedback on your customers. They can anticipate and resolve payment arrears from a customer to minimize your bad debt.
AIG is one of the most reliable trade credit insurance companies with over 35 years of experience. It has customers in over 70 countries and offers credit management tools, debt collection services, and comprehensive AR insurance.
Some of its main trade credit insurance policies are:
- Accounts Receivable Insurance- Cost-effective policy to ensure steady cash flow and mitigate non-payment risks by key customers
- Trade credit insurance- Protects against the risk of non-payment due to insolvency, political risk, or war that can prevent contract performance
- A/R Secure®- Provides non-cancelable credit limits for businesses making annual sales between $10 million and $100 million
- Top accounts/Single Buyer- Offers coverage of non-payment by a single key customer
They also offer credit insurance for banking and financial institutions, manufacturers and lenders, multinationals, and domestic and export credit insurance for global sellers.
The world's largest publicly traded P&C (property and casualty) insurance company is Chubb. It operates in more than 54 countries and territories with more than $200 billion in assets.
Depending on your business and its specific requirements, Chubb offers multiple ways to safeguard you against the non-payment of invoices by your customers.
- Single Customer- For coverage against non-payment by one key account that could severely impact the business
- Named Customer- Designed for a portfolio of customers that is weighted towards large exposures
- Multi-Buyer- Comprehensive cover for companies who can share risk and want an insurance partner in addition to their credit management team
How to choose a trade credit insurance company
Before you buy coverage, it's essential to do your due diligence and compare coverage, price, and policy limits between different companies.
When comparing policies, consider the following factors:
- Coverage - Ensure the policy you buy provides adequate coverage for your business activities. Assess whether you need international coverage, single customer, or whole turnover insurance. Accordingly, find out if the accounts receivable insurance company covers all kinds of non-payment like insolvency, political risk, war, etc.
- Policy limits - Every trade credit insurance has a limit. Sometimes it also has a minimum deductible, meaning you'd nearly bear that minimum amount in the event of non-payment. The coverage limit is the maximum amount that the insurance company will pay out if you have a claim. Looking at your business's cash flow and profit margin is essential to determine the appropriate policy limits.
- Rates - Compare rates between different companies and make sure you're getting a good deal. Shop for quotes from multiple insurers and compare coverage, price, and policy limits.
- Reputation - Make sure the company you choose has a good reputation and is financially stable. A financially stable company will be able to pay claims promptly regardless of the state of the economy. Check third-party review sites for existing user reviews of the credit insurance company.
Alternative to accounts receivable insurance companies
Trade credit insurance companies provide a strong safeguard against unpaid invoices. They can help you get paid in the event of any unforeseen circumstances, such as insolvency, bankruptcy, political risk, or war.
However, small businesses and manufacturers who rarely deal in international trade might not require comprehensive coverage.
The insurance also doesn't offer any immediate relief in cash flow because they can only claim the insurance amount after the customer fails to pay by the due date. Moreover, the insurance premium could prove to be expensive for small businesses.
In these cases, your business can opt for alternative options to accounts receivable insurance companies. These options include sophisticated credit management software or using net terms as a service provider like Resolve.
Resolve can act as one of the best alternatives to traditional trade credit insurance companies. It offers fast and confidential credit checks to determine the proper credit limit and the best credit terms.
Once they approve the customer invoice, they also offer up to 90% upfront payment to your business, so you don't have to wait for payment until the credit term ends. Resolve also collects payment from your customers, thereby ultimately minimizing your risk.