Maintaining a healthy cash flow is crucial for any business, especially when dealing with clients who purchase on credit. Accounts receivable insurance serves as a safety net, protecting businesses from the financial risks associated with unpaid invoices.
In this guide, we explore what this type of insurance entails and why it is a vital tool for modern businesses.
What is Accounts Receivable Insurance?
Accounts receivable insurance, often referred to as trade credit insurance, is designed to safeguard businesses against losses caused by customer non-payment. Whether due to insolvency, bankruptcy, or prolonged delays, this coverage ensures your revenue remains stable even in uncertain economic conditions. It is especially useful for companies operating in industries prone to fluctuating market dynamics.
How Does It Work?
The insurance policy is tailored to your specific needs, covering a portion of the value of your outstanding receivables. For example, if a key customer defaults on a £100,000 invoice, the policy might reimburse up to 90% of that amount. The process typically involves working with a credit insurance broker, who helps assess your risks, customise the policy, and manage claims efficiently.
Key Benefits of Accounts Receivable Insurance
- Protecting Cash Flow: By covering unpaid invoices, the insurance provides financial stability, allowing you to focus on growing your business without worrying about bad debts.
- Facilitating Growth: With receivables secured, businesses can confidently extend credit terms to new and existing clients, fostering growth without exposing themselves to undue risk.
- Improved Financing Options: Many lenders view insured receivables as lower-risk collateral, which can improve your access to financing and favourable terms.
Who Needs Accounts Receivable Insurance?
This insurance is beneficial for any business that extends credit to its customers. Manufacturers, exporters, wholesalers, and service providers can all gain peace of mind knowing their receivables are protected. It is particularly valuable for companies operating in international markets, where political and economic risks can add further complexity.
In conclusion, accounts receivable insurance is a powerful tool that shields businesses from the uncertainties of credit sales. By partnering with a credit insurance broker and tailoring coverage to your unique needs, you can safeguard your cash flow, enable sustainable growth, and secure your business against unexpected losses.