Accounts Receivable Insurance: Protecting Your Business and Fueling Growth

What is Accounts Receivable Insurance?

Accounts receivable insurance, also known as A/R insurance or trade credit insurance, provides companies with protection against customers failing to pay what they owe by securing their accounts receivable. This type of insurance has been widely used by European companies for decades and is now becoming more common among businesses of all sizes in North America as well.

On average, 40% of a company’s assets are in the form of trade debts. This means there is a greater chance that a business will experience a loss within its accounts receivable than any other asset. Accounts receivables directly affect cash flow and profitability, making them a critical component of a company’s balance sheet.

While many U.S. companies are thorough in protecting against losses related to property damage, liability, and other high-exposure risks, they often fail to view accounts receivable as a valuable asset that should be secured. This leaves them exposed to potential cash flow and revenue problems. Accounts receivable insurance offers a safer way to do business.

What Does Accounts Receivable Insurance Cover?

Accounts receivable insurance is designed to protect your business from non-payment of commercial debt. If a customer does not pay due to bankruptcy, insolvency, or simply failing to pay on time, an accounts receivable insurance policy will pay you up to the insured credit limit. This coverage helps protect your capital, maintain cash flow, and secure earnings while allowing you to extend competitive credit terms and access more attractive financing.

There are four main types of accounts receivable insurance:

• Whole Turnover: Protects against non-payment from all customers for domestic sales, international sales, or both.
• Key Accounts: Insures your largest customers whose non-payment would pose the greatest risk.
• Single Buyer: Covers potential default from just one primary customer.
• Transactional: Protects against non-payment on a transaction-by-transaction basis, ideal for companies with few sales or only one customer.

Benefits of Accounts Receivable Insurance

While accounts receivable insurance acts as a shield to protect against non-payment risks, it can also serve as a sword to help grow sales and obtain better financing terms:

1. Expand Sales

An accounts receivable insurance policy allows companies to feel secure in extending more credit to current customers or pursuing new, larger customers that may have previously seemed too risky. This protection enables businesses to increase sales and grow their operations.

2. Gain a Competitive Edge

With access to extensive knowledge about the creditworthiness of new and existing customers, companies with accounts receivable insurance can prevent losses and improve internal procedures. This allows them to make credit decisions quickly and gain a major competitive advantage by offering more attractive terms to customers and prospects.

3. Obtain Better Financing

Banks typically limit borrowing based on the perceived risk of international receivables, concentration of sales to large customers, or age of certain accounts. When domestic and international receivables are covered by an accounts receivable insurance policy, companies may be able to borrow more, often at more favorable rates.

How Accounts Receivable Insurance Coverage Works

Once a partnership begins, the insurance provider analyzes the creditworthiness and financial stability of insurable customers. Throughout the policy’s life, policyholders may request additional coverage on specific buyers or coverage for new customers. The insurer will investigate the risk and either approve additional coverage or provide a detailed explanation for maintaining existing limits.

Insurers continuously monitor policyholders’ buyers, as creditworthiness can change throughout the year. This ongoing analysis allows companies to make more informed decisions about extending credit and helps avoid accounts receivable losses through close monitoring of customers.

Is Accounts Receivable Insurance Worth the Cost?

The cost of accounts receivable insurance is typically calculated as a percentage of a company’s sales, usually a fraction of one percent on average. The exact premium depends on factors such as:

• The type of coverage chosen
• The sector and geographies involved
• Past losses experienced
• Customers’ creditworthiness
• Internal credit procedures

When evaluating the return on investment, consider that the cost of non-payment can be substantial. For example, with a 5% profit margin, a $100,000 debt would require $2 million in new sales to make up for the lost profits. Additionally, bad debts can weaken a company’s financial position through reduced cash flow, diminished investment capacity, and poor employee morale.

Avoiding these negative outcomes, combined with the potential for increasing sales safely thanks to reliable creditworthiness data, often justifies the cost of receivables insurance and enables businesses to turn this solution into a growth driver.

Protect Your Business with Accounts Receivable Insurance

In summary, when you insure your accounts receivable, you can count on being paid for what you sell, even if a covered account suddenly faces insolvency or is otherwise unable to pay. For a minimal cost, you gain peace of mind and the ability to make data-informed decisions about selling to new customers or extending additional credit to existing ones.

Accounts receivable insurance is an excellent way to ensure you don’t leave money on the table due to an overly conservative risk posture. By protecting your assets and enabling growth, this type of insurance can be a valuable tool for businesses looking to thrive in today’s competitive marketplace.