A large part of business is planning ahead. It’s about valuations, about future earnings, and sometimes it’s about having enough to cover payroll at the end of the month. Much of this come from knowing what you’re owed, and when it’s coming in: your cash flow. When businesses have purchased your goods or services, chances are your expecting that money to come in and have planned accordingly in your budget. If a buyer was suddenly unable to pay, you can find yourself in a tough situation, with a sudden downturn in profits or dipping into emergency funds to pay your employees.
When your company enters into an agreement to sell its goods and services on credit to a buyer, this simple acts places your company at risk. If the buyer then turns around and can’t pay when its due, it then falls to you to get them to pay while bailing yourself out of the red. To cover this risk, many goods and service companies take out a form of credit insurance known as Trade Credit Insurance.
How Trade Credit Insurance Works
Trade credit insurance works by providing protection to your accounts receivable, making up the difference if a purchase made on credit falls through due to the defaulting of the buyer citing financial issues. The amount of credit coverage depends on the amount of accounts covered and analysis of your accounts receivable, among other factors, and will provide credit coverage up to that limit in your accounts receivable.
The Benefits of Having Credit Insurance
Obviously the biggest advantage of having trade credit insurance is having coverage against one of your buyers defaulting on payments to your business, but this in turn provides some additional benefits:
- Having protected credit allows you to offer on-credit purchases to more clients.
- Protecting your risk allows for more competitive terms of sales.
- Coverage is flexible, allowing you to protect accounts receivable for all accounts, or specific ones such as exports or multinational sales.
- Most agencies who provide this service provide connections with credit export businesses and debt collection services.
Why Use or Expand Your Company’s Trade Credit?
Offering your services or goods on credit has several major advantages. If you’re selling a product to vendors, those vendors may need to sell the product and generate income from those sales in order to pay for the product. Trade credit is widely used in international trade, where the time between delivery and sales can be delayed by days or weeks. Insuring your trade credit in these circumstances is even more important, as changes in policy or situation at the importer’s location may affect your product getting to them, or their ability to pay.
Interested in learning more about trade credit insurance or other business insurance that can expand your services and limit your risks? Contact TJ Woods Insurance Agency to learn more about your options, and to receive a free quote on credit insurance and other commercial insurances.
