Do you need trade credit insurance?

Do you need trade credit insurance?

As your business grows, you will likely expand your trading ventures overseas and within Australia, probably becoming a trade creditor at some point. But this important and beneficial corporate move is not without risks of its own. As other enterprises accrue unpaid debts to your company, you should seriously consider taking out trade credit insurance to mitigate any concerns and business risks you begin taking on.

What you need to think about is whether you, as a corporate leader, should pay for this type of cover or if you want to risk going without.

The basics of trade credit insurance

Trade credit insurance can help businesses safeguard against any potential losses that would otherwise be incurred due to non-payment.

First things first, it's important to understand what trade credit insurance is and what it covers. Simply put, trade credit insurance can help businesses safeguard against any potential losses that would otherwise be incurred due to non-payment of trade-related debts. 

By taking out trade credit insurance, an enterprise can mitigate risks associated with the failure of any of their customers, which could spell significant financial trouble if they went under while owing your business trade debts.

Those with this type of cover would also have access to expertise and market knowledge, professional assessments, indemnification of their own unpaid debts, and access to debt collection services. This last business tool can be invaluable should customers become insolvent in repayments and aid greatly in the recovery process.

Avoid protection gaps

Those without trade credit insurance also take on the risk of falling into one of the many associated gaps that could spell serious trouble for businesses. 

When enterprises take on in-house risk management strategies, they also lean heavily on self-insurance to shore up their finances, which breeds ineffective cash flow management and stunts growth. Plus, when trading in an uncertain global marketplace, having this type of cover is one of the few ways to protect one's company now and going forward. 

There is very little business leaders can do to control the global market. Because trade debts can make up a significant amount of business assets (up to 40 per cent in some cases), a failure to ultimate recover finances is too much of risk to take with a profit margin. A significant lost debt (like if a trade partner goes under without repayment) can mean a heavily weakened financial position for your company, which can have adverse effects on investments, your ability to secure loans and even employee morale going forward.

The biggest benefits

When it comes to taking out trade credit insurance cover, there are few drawbacks that accompany investing in this business tool. Overall, the benefits heavily outweigh any of the potential hesitations company owners might encounter, but it is a worthy protection to have in place in the long run.

The most significant benefits of this type of cover include:

1. Potential losses reduced
Losses due to unforeseen events are significantly reduced, as there is now a safety net in place that protects against both domestic and international cases on non-payment.

This can also be weighed against the actual cost of premiums, which tends to be calculated based on turnover and risk. That, paired with peace of mind, often makes this a smart fiscal deal.

2. Market penetration and sales growth improvements
You can relatively easily expand your company without trade debt repayment worry. You would also be able to extend lines of credit to worthy customers and change terms to new trade credit account holders, should you so choose, thus making for a more competitive export market.

3. Increased access to working capital
Many cash flow problems that you may otherwise face without insurance would be solved, given that accounts receivable would be covered by insurance.

This is also important to financiers, as many lenders are more apt to work with companies that have insurance, as it reduces their own risk when doling out loans.

4. Managed credit risk
Your insurance provider could help you mitigate risk and act as a business advisor to continue to make appropriate corporate decisions to avoid losses and take advantage of available intelligence and insight. This would also help you avoid any adverse impacts that would affect your company and pick out warning signs that could spell trouble down the road.

Use trade credit insurance providers' business advisory services to pick out red flags that could spell trouble.Use trade credit insurance providers' business advisory services to pick out red flags that could spell trouble.

Managed risk starts from day one – trade credit insurers can often assess creditworthiness before doing business with a new customer, setting your company off on the right foot when opening up new trade ventures.

5. Lowered bad debt reserve
Another enterprise benefit of trade credit insurance is the debt recovery service and ability to manage debt write-offs. This would improve net earnings, financial ratios and shareholder equity, placing your company in a better position fiscally.

Coface is a global leader in trade credit insurance. To find more information on how we can help your specific business and learn more about trade credit insurance cover and how it can benefit your enterprise, contact our team today.