Companies provide health insurance for employees. They take steps to insure their property and equipment, to protect the business in the event that an employee is injured on the job or when a product doesn’t perform as expected.
“But there is one very important component to a business that is commonly left out of the mix when it comes to insurance,” says Joseph L. Feigenbaum, Vice President at Woodruff-Sawyer & Co.
“What’s the one thing no company can live without?” Feigenbaum says. “The answer is revenue. It’s easy to assume that your customers are always going to pay for the products and/or services you provide, but what if they don’t? I don’t know of any company that can exist without revenue, yet they don’t insure it. That’s what trade credit insurance does.”
Trade credit insurance originated in Europe prior to the creation of the euro to resolve problems that involved cross-border transactions. Instead of searching for an attorney who understood bankruptcy laws in the respective country, you could let your trade credit insurance carrier resolve the matter.
It’s become a popular tool for European companies to protect their interests and revenue, but the trend is just now starting to spread to the United States, where only 15 to 20 percent of companies purchase trade credit insurance.
Smart Business spoke with Feigenbaum about the value of trade credit insurance and how it can strengthen a company’s financial future.
Why is now a good time to look at trade credit insurance?
In terms of your own financial outlook, obtaining trade credit insurance demonstrates to your bank that you’re serious about protecting your receivables. Doing so can help you secure the funding you need to continue to grow your business.
But just as important is the protection trade credit insurance offers you against situations where your customers can’t or don’t pay you for services rendered. The Federal Reserve has made it known that it wants to continue raising interest rates.
As those rates go up, the ability for companies to borrow money and repay it after getting used to low interest rates could lead to more bankruptcy cases. If you’re insured, your revenue is protected.
Where do you begin in crafting a policy?
When you talk to your insurance carrier, you’ll be asked to look at your customer portfolio. Do you have a few larger companies that account for the majority of your revenue? Or is your revenue more evenly distributed amongst a group of customers?
Your insurance carrier isn’t going to let you cherry pick the ‘bad’ customers. For example, if you’re an electronics firm, you’re not going to be able to pick out for coverage Sears or Kmart, two companies that are currently not performing well in the market, to go bankrupt. You could choose to insure your top five or your top 10 customers. You could also be more selective, but it can’t just be your high-risk customers.
Alternatively, it may be a situation where you have a customer that isn’t high risk, but is one that makes up a huge portion of your revenue. The impact of this customer going bankrupt could be catastrophic. Overall, the process is geared toward developing a policy that best protects your business no matter who your customers are.
What are some other important things to know about trade credit insurance?
Trade credit can also help a company increase sales either by providing information on buyers in foreign markets, or by allowing current customers an increase in their credit limit. However, trade credit insurance is not always a good fit. Companies with thousands of smaller customers (sales under $50,000) probably wouldn’t have use for such a product.
One last key point is that trade credit can help in the overall management of a company’s credit exposure. For example, let’s say you have trade credit insurance with a coverage limit of $500,000 for a given company, and you find out that the coverage has been reduced to $300,000. If you’re a smaller company that doesn’t have a robust credit department such knowledge could help inform your business decisions as you move forward. ●
Insights Business Insurance is brought to you by Woodruff-Sawyer & Co.