Trade credit is an excellent commercial tool for building consumer loyalty and conquering new markets, but it can also weigh on your cash flow and your working capital.
That’s where trade credit risk insurance comes into play. You can incorporate this type of insurance into your cash flow management strategy to help you control this kind of risk. Trade credit insurance helps to make sure that you are quickly compensated in the event of bad debt. Your working capital ratio increases and any uncertainty around your cash inflows dramatically decreases.
Trade credit insurance can also enable you to significantly improve your day sales outstanding, also known as your DSO, which is the average number of days it takes to recover payment after making a sale. The insurance also guarantees that you are able to manage your investments and operations efficiently in the short term and the medium term and to boost your growth over the long term.
Furthermore, trade credit insurance gives peace of mind to your financial partners and gives them more incentive to guarantee your financing. The insurance also protects and speeds up your commercial development while controlling any risks that trade credit poses to your cash flow, which gives you the benefit of a resilient and efficient trade-credit strategy.
Here are some of the top benefits of trade credit risk insurance:
- Sales expansion. When receivables are insured, your business can safely sell more to your current customers or seek out new customers that might have otherwise been perceived as too risky.
- Expansion into new international markets. Trade credit risk insurance also protects against unique export risks and gives you market knowledge to help you make better decisions about your business expansion.
- Better financing terms. Banks will usually lend more capital against insured receivables, and they might also decrease the price of funds.
- Reduction in bad debt reserves. Insuring receivables frees up capital for your business. Credit insurance premiums are tax-deductible, while bad debt reserves are not tax-deductible.
- Actionable economic knowledge. The trade-credit insurer’s technology platform and information database help decrease the informational and operational cost.
- Protection against non-payment and catastrophic loss. If an unexpected event catches your business and your insurance carrier without any warning, your bill will get paid through the claims process.
- Increase in sales and profits. A trade credit risk insurance policy will usually offset its own cost multiple times over, even if you never make a claim because it increases your business’s sales and profits without the extra risk.