3PL Perspectives
The Advantages of Credit Insurance
Jaki Ferenz | Avalon Risk Management
Expanding your business involves research, planning and assessing opportunities as well as risks. Working with new customers creates certain challenges that vary from risks involving established clients. Let’s discuss risks involving both new and existing clients. What are the risks with established clients who experience financial hardship? Have you considered risks involving new clients who have no financial history? Do you plan on having an international presence?
When you are looking to expand your business, working with an established client is an obvious choice. However, even if you have a solid relationship with your client, it is necessary to review your client’s financials. For example, assume that the majority of their assets consist of their accounts receivables. Accounts receivables can be considered a liability because a default from any one of them could adversely impact your company. There could also be the possibility that one of your largest clients unexpectedly files bankruptcy and can no longer pay their bills. This will impact you because you are not able to collect the monies owed. You have to consider whether or not you have the capital to stay afloat without the income you expected. Another example is that your client experiences a temporary financial hardship. Due to this temporary setback, they ask you for less restrictive credit terms or even a higher credit limit. You certainly would like to maintain a good relationship with your client; however, you want to be sure your cash flow can sustain the possibility of non-payment.
New clients pose different risks when you want to expand your business. A new business does not have the financial backing/history of an established business. You also are less familiar with their business operations. A new client may request looser credit terms because they haven’t accumulated the reserves that more secure companies have, and you must decide if you are willing to insure them. You will need to assess the associated risks thoroughly, which includes considering their financial history and other factors. This can be a time-consuming and tedious process.
Credit insurance’s valuable protection means having consistent cash flow and peace of mind knowing that your account receivables are protected.
In addition to new business partners, you may also have opportunities to grow your business abroad. This means entering an unchartered territory for your company with the inherent risks of being less familiar with local customs and the business environment. The company may expect laxer credit terms than you usually offer your domestic customers. You could also inherit the political and economic perils that the country may encounter.
Many organizations operate with the risks mentioned and believe it to be a part of doing business. However, these are risks that can be managed by having credit insurance. Credit insurance’s valuable protection means having consistent cash flow and peace of mind knowing that your account receivables are protected. With this assurance, you can boldly expand your business without the concern of credit issues. You will not have to set aside cash to cover bad debt. This cash reserve serves as an emergency fund in case debt becomes uncollectable. Although it may be a good defensive strategy, it isn’t a good offensive strategy because the money isn’t utilized to generate revenue or grow the enterprise. When bad debt isn’t a concern, your cash reserves can then be used toward your working capital and growth.
Credit insurance gives you the latitude to continue your business relationship with your client even during tumultuous times. You can be assured that you will get paid even if you are nervous about a default due to a financial hardship your client is experiencing.
When you are ready to decide on whether to proceed with a new client, insurance underwriters can promptly give you the creditworthiness of your prospect. They specialize in credit risk assessment, and their extensive knowledge can help you make a more informed decision on whether to approve credit terms and recommend appropriate limits. Your customers will appreciate the quick turnaround, and you may be able to start working with them much sooner.
If your concern relates to international expansion, a credit insurance policy often covers political risk. This allows you to expand into a new market with less exposure. When you are assured of payment, you can offer more competitive credit terms to new customers in new markets that you once thought were too risky.
Obtaining credit insurance is beneficial to your organization as a whole. Your internal management team will benefit from the credit assessment and continuous monitoring due to extensive resources insurance companies have access to. Additionally, the insurer’s professional staff will handle the debt collection process for invoices that are insured. This eases the burden on your employees so they can focus on their primary tasks. Credit insurance isn’t insurance that you purchase for a rainy day; it is a beneficial vehicle that can give you the confidence and peace of mind when assessing new risks.
Jaki Ferenz is vice president of Avalon Risk Management, an Insurance and Surety provider headquartered in Elk Grove Village, Illinois. She can be reached at [email protected]
This information is general in nature, and your specific exposures should be reviewed with your insurance broker and your attorney. Relying on general information can be risky. The reader assumes all risk in the use of such information, and actual policy terms, conditions and exclusions will prevail. All logistics companies should use Terms and Conditions of service.
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