You may hear the term A/R insurance regarding accounts receivable insurance. It is the same concept and the terms used vary by business. Such coverage means the company is protected against losses financially if those they extended credit to fail to pay what they owe.
The need for accounts receivable insurance continues to grow. It offers a business a safeguard when they are anticipating income from a partner source. The company could face financial challenges or even go under if they don’t get paid according to the established terms. With so many changes in the economy today, it isn’t worth taking a risk. The insurance coverage helps reduce the risk of such a financial hit creating serious problems for your business.
Statistically, about 40% of the assets of any given business are actually trade debts. The highest risk of financial loss stems from accounts receivable income that isn’t repaid. Keeping the finances of the business balanced is essential. They play a role in profit and also the ability to have the cash to pay your business expenses.
When you extend terms to a partner with accounts receivable, the belief is they will repay that as agreed. There are many circumstances though that prevent that from happening. This includes changes in the economy, changes in consumer demands, and even the COVID-19 pandemic. There are variables you can’t control.
However, you don’t have to leave it up to chance that you will get paid for the credit you extend. With accounts receivable insurance, you have a way to protect your company against such potential losses. It can give you peace of mind and ensure your business doesn’t fail due to the actions of others. Don’t leave your business vulnerable! This type of insurance can help you avoid pitfalls that aren’t within your control.
With accounts receivable insurance coverage, you pay a premium that is far less than the potential loss. The provider will carefully evaluate the risk of you extending credit to a given entity. They may decline coverage for that provider so you may decide not to work with them. They may limit the amount of credit liability with a given partner due to their credit or their overall financial status.
What is covered with Accounts Receivable Insurance?
With such coverage in place, your business has protection when a commercial company fails to repay you as agreed. The policy can cover up to the agreed amount and it is a good idea for you to know those limits. Always review your policy carefully and ask for clarification of anything you aren’t sure of.
You can’t control if a company goes out of business or they choose not to pay you what they owe. The ripple effect from not getting that money can be hard for your company to recover from. With the insurance policy in place, you can recoup that money through another avenue. You will be able to continue to operate your business and your cash flow won’t become a bottleneck.
This type of insurance helps you feel good about extending credit to worthy partners. It can help you offer them attractive terms. At the same time, it helps you keep your business income coming in. You don’t want your own creditworthiness to suffer because someone didn’t pay you. There are different types of insurance coverage for accounts receivables to consider.
Take a closer look to determine which is right for your business.
- Key Accounts – This coverage allows you to insure only your largest customers. Such coverage is going to reduce the most risk to your business. Should one of these larger customers not pay you, it could be detrimental to the future of your business and hard to recover from. This type of coverage would prevent such a scenario.
- Single Buyer – You may have a particular buyer you do the majority of your transactions with. You can decide to buy coverage for individual accounts only rather than all of your accounts.
- Transactional – If you only have a few sales or you have a few customers, transactional coverage may be a good fit. It can be secured for individual transactions rather than across the board.
- Whole Turnover – If you do business with plenty of partners, whole turnover accounts receivable insurance is recommended. This protects you against all such transactions with all of your customers. It can be used for both International and domestic sales.