Trade
Credit Insurance
v A Competitive Advantage for Manufacturers
Whether trading with established customers or seeking new
markets, a company can use trade credit insurance to protect its cash flow and
balance sheet against the unexpected shock of non-payment.
Jochen Delmer, CEO, Euler Hermes Americas Region | Nov 01,
2013Accounts receivable (A/R) will represent up to four-hundredth of a
company’s assets, and in today’s difficult setting, non-payment of any portion
of this could become a heavy money and operational threat to an enterprise. For
example, if a customer defaults on a $100,000 invoice from a company with a 5%
profit margin, that company will have to generate $2 million in additional
revenues to make up that loss.
The underlying reasons for a default may vary from the
speedy rate of technological amendment and its result on international client
demand, to political upheaval in key markets, to regional economic trends and
government policy amendments—all of which might quickly change a customer’s
risk profile and talent to pay invoices, and leave suppliers holding the bag.
Today’s competitive business landscape will squeeze company
margins to the purpose wherever it doesn't take several debt write-offs to push
the corporate to the verge of collapse. Effective management of accounts
receivable are, therefore, a vital component of a healthy business.
Trade credit insurance is a tool used to reduce or eliminate
the risk of non-payment of commercial debt. If a policyholder’s client fails to
pay, the insurance company makes good on the obligation. This allows a
corporation to scale back the chance it would incur once taking over
new—particularly unknown—clients, or when unforeseen economic, business, or
other factors affect its clients’ abilities to pay their bills. It permits a
corporation to cultivate shoppers in sectors or geographies that square measure
outside its traditional shopper base or geographic market, do more business
with existing clients, and extend more credit to its customers, all without
increasing the risk of non-payment.
Trade credit insurance accomplishes this by giving the
corporate access to the insurance company’s credit risk analysis and management
experience, and ability to monitor domestic and global developments that could
affect a customer’s ability to pay its bills. Few companies on their own can
rival the expertise or database of a major global trade credit insurance
provider, but nearly everyone can access that expertise by purchasing
insurance.
Many firms at first purchase trade credit insurance to guard
capital, cash flow and earnings. They conjointly realize that the merchandise
permits them to securely and strategically expand their businesses, thereby
increasing sales and profits.
Take, as an example, a wholesale company whose credit
department had restricted a customer’s credit line to $100,000. The company
then purchases a trade credit insurance policy and, after an analysis of the
customer’s credit and financial performance data, the insurer approves a limit
of $150,000 on that same customer. With margins of 15 August 1945 and a median
days sales outstanding (DSO) of forty five days, the wholesaler is able to
increase its sales to realize an incremental annual gross profit of $60,000 on
just that one customer account.
Trade credit insurance can also improve a company’s
relationship with its lender. In some cases banks really need trade credit
insurance to approve a loan. For example, a $25 million scrap metal dealer
might have extreme concentration in its accounts receivable because it only has
eight active customer accounts. The smallest of those customers has assets
balances within the low six-figure vary, and the largest is into the low
seven-figure range. The company’s bank becomes involved concerning this
concentration and needs trade credit insurance to completely leverage the
assets as collateral. The trash dealer purchases a trade credit policy that
specifically names all of its consumers, providing the bank the comfort level
it must increase the eligible assets.
0 Response to "Trade Credit Insurance"
Post a Comment