By: By: Kevin Ricciotti
Vice President, Business Development Western Region, Avalon Risk Management
Accounts receivable make up almost 40 percent of a company’s assets yet are one of its most vulnerable assets. Non-payment of invoices can affect a company’s cash flow and capital to the point of shutting down its operations. Managing this risk should be a priority for companies especially with inflation affecting the cost everything from household essentials to vehicles.
Economists predict that the U.S. is headed for a recession in 2023. Unfortunately, small businesses are usually the hardest hit during a recession. Most small businesses do not have the financial wherewithal to afford a reduced cash flow due to delayed customer payments. According to a survey conducted by JP Morgan Chase, the average small business holds 27 cash buffer days in reserve. Trade credit insurance is one tool that can help 3PLs prepare for recession.
Trade credit insurance’s valuable protection means having a consistent cash flow and peace of mind knowing that your accounts receivable will be paid. The insurer helps you maintain a robust credit risk management process by continuously reviewing your customers throughout the policy period to ensure their continued creditworthiness. If there are signs that a company is experiencing financial difficulty, you will be notified of the increased risk. Trade credit insurance also provides additional benefits such as sales expansion, providing extra credit to current customers, and ability to obtain better financing terms from lenders.
Trade Credit Insurance Benefits
Trade credit insurance allows you to expand your business while mitigating bad debt risk. New customers pose a challenge because they still need to establish a credit history, and you need to become more familiar with their operations. However, with trade credit insurance, underwriters provide insights to help you decide on whether to approve credit terms or not.
You may have an existing customer who requests a higher credit limit or who applies for less restrictive credit terms than the usual 30, 60, or 90-day terms of sales. If their receivables are insured, you can be confident in approving an increase in credit or longer credit terms. Doing so can not only grow sales but also strengthen your customer relationships.
Access better financing options
Banks often consider accounts receivable a liability, primarily when open invoices are concentrated among a few large customers. The debt is considered riskier because a default from any one of them would significantly impact on your business. However, when accounts receivable is insured, they can be deemed an asset or collateral since it is secured money.
Reduction in bad debt reserves
To avoid having sudden cash flow interruptions, companies set aside a reserved cash amount if a debt becomes uncollectable. The bad debt reserve is essentially an emergency fund for the business and decreases the amount of working capital available. Smaller 3PLs cannot afford to have $40,000 or $50,000 tied up in a bad debt reserve as they need the monies readily accessible. Having trade credit insurance allows companies to reduce or not have a bad debt reserve since their invoices are insured.
Protect from loss due to non-payment
Trade credit insurance provides indemnification from customer non-payment. Your business is insulated from a customer’s financial trouble, and you can continue operating normally.
While trade credit insurance protects you from problems associated with uncollected commercial debt, its goal is to help your company expand. Make sure to talk to your insurance broker about the benefits of trade credit insurance.