How does credit insurance help the bottom line?
Credit insurance can be used to enhance your receivables portfolio, which, in turn, allows competitive financing, improved ‘cost of funds’ and the ability to negotiate advance rates. This can apply to the full spectrum of facilities, from invoice discounting to off-balance-sheet securitization.
In addition, credit insurers have developed sophisticated data analysis tools that can provide you with the latest intelligence on your company and on the economy. They can provide a credit evaluation service, which will help you decide on the best level of credit for each of your customers, or provide you the ability to set your own insured credit limits.
How does credit insurance work?
A typical policy covers a total debtor portfolio or a selection of key customers. To activate the coverage, you establish credit lines on your customers, either internally or via the credit insurer’s in-house resources. Premiums can be charged on the credit line, on outstanding receivables, or on turnover (sales). Claims are paid at 85 to 100 percent of the bad debt after an agreed-upon grace/waiting period (e.g. 30 days for insolvency).
Why do companies need credit insurance?
There are a number of scenarios in which companies buy credit insurance. Some buy it to reduce or transfer the risk of nonpayment from their balance sheets to an insurance company. Others buy it to increase their ability to borrow against receivables, or to be more competitive by offering longer terms of sale or increased credit lines to their buyers. Another group may buy it to allow the company to safely enter new markets and to be able to safely offer terms to new buyers.
Has the need for credit insurance increased as international business has increased?
Absolutely. Credit insurance is very common in Europe. Because of this, European companies are more willing to offer payment terms when they export. Companies in the United States have now found that they, too, have to offer similar terms to be competitive. Many companies have turned to credit insurance as a way of mitigating the risk of offering credit terms when they export.
Another benefit is that the leading credit insurers have extensive databases of financial information that their insureds can tap into to help them make more informed credit decisions in foreign markets.
Do all companies need credit insurance?
Any company can suddenly find itself having financial difficulties, and there aren’t very many buyers of unquestionable credit quality remaining. Unless a company derives all of its revenue from sales to the U.S. government, there is a reason to explore how credit insurance may enhance your receivables against a sudden financial meltdown.
Over the past couple of years, credit insurance has become a lot less expensive than it was in the past. Even though the market is beginning to change, rates are still relatively low, and quality coverage and capacity are available.
Pat Cantwell is a director with Aon Risk Services Central Inc. (www.aon.com). Reach him at (314) 854-0810 or [email protected].
