Getting Credit Where Credit is Due
As business owners many of us have the entrepreneurial bug. It seems that I have passed that gene onto my son.
This summer my son is working in New York City selling souvenir tee shirts to make spending money for college. He recently learned that anyone can sell goods from a cart there as long as it is your own artwork.
Now he is considering going into business for himself. His only hesitation is the risk of quitting his job and investing in tee shirts. I told him that if he made sound decisions as he approached the business, I would help him.
This seems like an excellent educational opportunity and one he wouldn’t get in the classroom. Sure it’s risky, but I am happy to back him up as he learns.
Wouldn’t it be nice as business owners to have someone backing us up?
That is the role of trade credit insurance, also called accounts receivable insurance. It’s there to protect you from customers who may default, so that you can continue to pay your bills and your employees.
Sometimes you can anticipate who will default – customers whose businesses are teetering or whose receivables keep you up at night. Sometimes you get surprised. If one of your customers’ customers defaults on them, it may make it hard for them to pay you.
“Anyone extending terms of credit to their customers is a candidate for trade credit insurance,” says Mary Shea, Senior Accounts Receivable Specialist at Accounts Receivable Risk Management LLC. “It’s not only who you are doing business with but who your clients are doing business with.”
A trade credit insurance policy can mitigate that risk and provide additional benefits.
The ability to file a claim and get paid when an account defaults is the most well-known trait of trade credit insurance. You can cover some or all of your accounts in your policy. It is common to exclude accounts considered less risky, usually large companies that are stable such as Wal-Mart or Hewlett Packard.
Some companies find the lesser known benefits of trade credit insurance to be just as valuable as the bankruptcy insurance aspect of it.
Trade credit insurance companies provide credit reference information to their clients on new accounts or on existing customers if the client is considering expanding their business with them. This saves money as clients no longer pay for credit reports.
In the event of a default, the trade credit insurance company also steps in to try to collect the debt. This service takes that burden off of client companies’ accounting departments, saving them time and money. And if the debt remains uncollectable, the policyholder can file a claim and receive payment.
Lastly, for clients who are looking to borrow money, the presence of a trade credit insurance policy can increase the client’s attractiveness as an asset-based lending customer to a bank or enable the bank to lend more than it would have without the policy.
The combination of credit reports, collection services and greater attractiveness to lenders can save a considerable amount of money and lift an unpleasant burden from your company. For some companies, the amount saved goes a long way to paying the policy premium and justifies the policy even without a loss.
Ms. Shea shared that “We have policyholders who are not experiencing losses, but are saving money because we provide credit referencing information, we can handle their collection needs for past dues accounts and we enhance asset based lending possibilities. In some cases, the money saved here pays for the premium expense.”
And of course there is the benefit of sleeping better knowing your receivables are covered.
Please reply to this email if you would like more information on accounts receivable insurance…or if you have a good summer job story to tell!