It’s clear that 2008 was the year of surprises in the business world. The market was ever-changing, many businesses surprised consumers by closing their doors, and some of the country’s biggest businesses required government assistance to stay afloat. If a business owner is able to find a tool at a relatively low cost that can assist in preventing surprises, then it is worth investigating.
Trade credit insurance can be that tool for many companies. This coverage is a risk management tool that helps business owners protect themselves from the exposure to bad debt losses from the companies with which they are doing business, says Charles Bernier, president of ECBM Insurance Brokers and Consultants.
Smart Business spoke with Bernier about trade credit insurance, the protection it can offer a company and why this may be a better time than ever before to seek out such coverage.
What is trade credit insurance?
Trade credit insurance is asset security. It prevents a devastating loss to one of a company’s biggest assets — accounts receivables. It offers cash flow protection against unforeseen nonpayments, slow payment or insolvencies.
Uninsured, you can only absorb a certain level of risk. Trade credit insurance allows you to take more risk. Trade credit insurance allows for increased borrowing power on your line of credit, normally at more favorable rates.
Is this coverage more important in today’s markets?
With many businesses unexpectedly closing their doors each day, this type of coverage can be very beneficial to the protection of your organization. Such coverage may help grow your business in hard times by making suppliers or financial institutions more comfortable to extend lending options to your business.
In many businesses, there are multiple layers of vendors. You may have a manufacturer, wholesaler, regional distributors and others. If one layer takes a hit from an unexpected event, it could affect all members of the chain. With credit insurance, you can protect your business from others’ unexpected misfortune.
Why is trade credit insurance important to the success of a business?
The research involved with trade credit insurance allows you to collect data from the marketplace about the companies to which you are extending credit, making all parties involved safer. It helps to increase sales while mitigating the risk you have in other companies’ financial position.
For smaller businesses, this insurance may increase their borrowing power and ease restrictions on their personal lending options. If nothing else, the credit insurance process will help you increase your understanding of your clients’ and your vendors’ future and how their future may affect yours.
Why are some companies hesitant to invest in trade credit insurance?
In some cases, companies are not aware that such insurance is available. Others may believe that the cost would outweigh the benefit. This product has been available for many years and is used more heavily in Europe where it has historically been harder to obtain financial information on foreign companies. Between the international business development that has been increasing in the U.S and the current economic situation, now is a great time to look at the benefits of this product.
As for cost, it is based on sales and the premiums run pennies on the dollar, but your broker will be able to work with you through the negotiation process. You may be able to defer some of the cost by obtaining lower interest rates on your line of credit, also eliminating LOC requests for international sales, or even adding to the cost of your product or service.
Should every company have trade credit insurance?
Trade credit insurance can benefit most companies. If nothing else, business owners really need to investigate trade credit insurance. Through the application process, they will learn more about not only their own company but also about all of the companies with which they are working.
Most companies who enter the application process see the true benefit of this type of coverage. Even if you decide your company does not need to purchase trade credit insurance, the process provides a new perspective on your clients, what credit is available and what other people are doing with their businesses.
CHARLES BERNIER is president of ECBM. You may contact him at email@example.com or (610) 668-7100 x1223.