Whether you’re a manufacturer, a distributor or a service provider, credit insurance protects a company’s Account Receivables and Work in Process (WIP), which combined often represent a significant portion of an enterprise’s assets. The importance of insuring receivables becomes acute when a company makes a significant percentage of their sales to one or to a handful of clients. This is what credit insurance experts refer to as concentration risk. Companies with significant concentration risk that choose to not insure their receivables are putting an important set of assets at risk by offering open payment terms and doing so without any insurance coverage. Would you consider lighting a fire in your wood stove or fireplace without fire insurance? Your home may never go up in flames, but the risk of catastrophic loss is very much real.
Okay, so credit insurance reduces the risk of not getting paid and the insurance carriers compensate you when things go badly. But how can credit insurance increase your access to capital?
Well, the short answer is that banks are willing to lend more money when Receivables are back-stopped by insurance. The banks recognize that you might not get paid from your customers even when you’ve done everything correctly and therefore limit borrowing if the receivables are uninsured. While the approach and percentages vary slightly from bank to bank, in general most financial institutions will lend against receivables and Work in Process according to Figure 1 below. While the increase in funding can be modest for companies selling only to Canadian customers, those companies which sell to customers outside of Canada or those with a substantial amount of WIP on their books can see a very significant uptick in the amount of credit offered to them by the bank. This capital can then be reinvested into the company which fuels sales and growth.
There’s another way in which credit insurance can contribute to growing a company’s sales. Thanks to the reduction in risk and the increase in capital it provides, Accounts Receivable Insurance can give you the confidence to sell to customers in far-away countries or to sell on longer payment terms which in turn helps close more deals by making you more competitive.
As you can see, credit insurance is the triple threat of the financial world. It can reduce risk, increase access to capital and help grow sales. Given this reality, ask yourself, have you seriously considered how credit insurance can help you?
About the Author
Patrick Adam is an insurance professional with 10 years of experience in credit insurance. Before joining Nacora, Patrick spent several years working as an underwriter in credit insurance at Export Development Canada, the largest insurer in the field in Canada.
Patrick can be reached at Patrick.Adam@Nacora.com.