What is accounts receivable insurance?

Accounts receivable insurance—which is also referred to as Trade Credit Insurance—protects a company’s valuable accounts receivable assets from risks of a political and commercial nature that are beyond an organization’s ability to control. It is designed to protect a company against financial losses that result from a customer that fails to pay what it owes to the company and from the loss of records caused by a covered event. Events that negatively impact a company’s accounts receivable have a direct impact on its cash flow and profits and could leave a company unable to collect money that is due from customers and creditors. It could also result in additional costs to the company.

When a client pays for an item or service on credit, comprehensive records allow a company to track payments and ensure timely payments as well as enforce interest charges for late payments. If those records are lost, the company could lose thousands of dollars in revenue. Accounts receivable insurance protects a company in these situations. It can also cover indirect losses such as interest payments due on loans covered by receivables. Additionally, accounts receivable insurance allows companies to extend more credit to customers without the fear of non-payment. These concerns are becoming more significant as the percentage of trade debt comprising companies’ assets increases, resulting in a greater risk of loss from accounts receivables than from any other company asset.

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When do I need to be aware of accounts receivable insurance?

When customers and clients default on payments, are insolvent, or go bankrupt, a company experiences cash flow and revenue problems. In addition, events arising from political unrest or from a fire or a flood could wipe out a company's financial records. This might include the records of customers who have bought items on credit. When losses related to property damage and other kinds of unpredictable risks occur, accounts receivable insurance kicks in. Specific policies may differ, but the insurance could cover such items as lost revenue, record restoration, IT work, and added employee work hours. In most cases, the insurer will calculate potential losses based on the past performance of a company, possibly adjusting for seasonal differences. Accounts receivable insurance can improve a company’s credit management and decision-making processes, helping businesses better navigate financial risks.

How accounts receivable insurance works

Accounts receivable insurance operates by providing businesses with coverage in the event of non-payment by customers. The process begins with the insurance provider assessing the creditworthiness and financial stability of the company’s insurable customers. This assessment involves assigning a proprietary risk grade to each customer. The risk grade helps forecast the probability of default and determines specific credit limits for each customer. If a customer fails to make a payment, the policyholder can file a claim to request reimbursement and initiate collections action by the insurer. This mechanism ensures that businesses are protected from financial losses due to non-payment, allowing them to maintain a stable cash flow.

What is important to know about accounts receivable insurance?

The insured has some options when deciding on accounts receivable insurance. Some items you should know about accounts receivable insurance are:

The methodology of calculating losses may vary between insurers.
The insurance usually covers expenses related to data loss recovery.
The coverage normally applies to added collection costs.
The coverage also pertains to interest charges on loans related to non-payments.

Benefits of accounts receivable insurance

Accounts receivable insurance offers numerous benefits to businesses, primarily by providing protection against non-payment risks. This insurance helps maintain cash flow and secure earnings, even when extending competitive credit terms to customers. By mitigating the risk of non-payment, companies can make more informed decisions about credit risk and maintain a competitive edge in the market. Additionally, accounts receivable insurance enables businesses to expand their sales and offer better terms to customers, which can lead to increased market share. Furthermore, having accounts receivable coverage can improve a company’s ability to secure better financing terms from banks, as it demonstrates a proactive approach to managing financial risks.

Types of accounts receivable insurance

There are several types of accounts receivable insurance, each offering different levels of coverage and protection for businesses. The most common type is trade credit insurance, which provides coverage for non-payment of commercial debt. Other types include receivable insurance, accounts receivable coverage, and receivable coverage. Each type of insurance is tailored to meet specific business needs, ensuring that companies can choose the most appropriate coverage for their unique circumstances. By understanding the different types of accounts receivable insurance, businesses can select the right policy to protect their financial interests and mitigate the risks associated with non-payment.

Accounts receivable insurance and cash flow

Maintaining a healthy cash flow is essential for any business, and accounts receivable insurance plays a crucial role in achieving this goal. By providing coverage for non-payment of commercial debt, this type of insurance helps businesses avoid cash flow problems and maintain financial stability.