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Protecting cash flow: the importance of trade credit insurance when money is tight

Protecting cash flow: the importance of trade credit insurance when money is tight article image

Many businesses choose their insurance policies based on how much the premiums cost before considering what’s covered in the policy.

However, there’s an interesting paradox in this situation. If the organisation needs to minimise the amount it spends on insurance premiums, that indicates cash flow is precious and needs to be protected.

Business owners could be failing to insure the very thing their business relies on to survive, namely cash flow, according to Atradius, a global leader in risk management and trade credit insurance.

“Trade credit insurance protects businesses when their customers fail to pay,” says Mark Hoppe, managing director, Oceania, Atradius.

“It can help keep an organisation’s cash flow healthy even when the revenue expected isn’t forthcoming. Insuring accounts receivable can help the business to operate with more confidence, knowing that cash flow won’t be disrupted even if customers don’t pay.”

However, many businesses avoid taking out trade credit insurance because of a misperception that it’s too expensive or that their business can’t afford it.

How costs are calculated

“The cost of trade credit insurance is calculated based on a percentage of the organisation’s turnover combined with the level of risk. That means every policy is priced according to the individual business’s circumstances and requirements,” Mr Hoppe said. 

“For example, if the business has a very low level of risk, the premium may be lower than a business with high-risk customers or operating in a high-risk industry. Furthermore, if the business owner elects to take on more of the risk, their premiums can be reduced further.”

It’s also important to recognise that trade credit insurance isn’t a single product, it’s just a term used to describe this type of insurance, he says. There are many products available, and each one is designed to suit a different need.

Designed to cover situations outside the organisation’s control

“For example, insurance premiums can be designed for businesses with revenue below $5 million or for larger businesses with significant domestic and/or export trade with turnover greater than $5 million.

“Or they can be geared for multinational businesses operating from multiple locations around the world, as well as special products designed to cover events and situations that arise outside the organisation’s control.

“The premiums for these products are typically less than 0.25 per cent of the turnover insured.”

Mr Hoppe says trade credit insurance providers can also add significant value to business operations by providing comprehensive market information that helps business owners make smarter, less-risky decisions around which customers to work with.

“Trade credit insurance providers can perform due diligence on prospective customers so business owners can determine whether to offer them attractive payment terms or require cash-on-delivery arrangements. 

“The value provided to an organisation could outweigh the cost of the premiums, not to mention the peace of mind business owners can gain just by knowing that the next time a customer doesn’t pay, it’s not money out of their bottom line.”

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