Accounts Receivable Insurance: Explanation of Accounts Receivable Insurance

New and growing businesses are most susceptible to severe setbacks and even bankruptcy through the inability to collect payments on outstanding invoices. Accounts receivable insurance will help protect your profit margin and help your company grow. An insurer also has the tools to help you improve your debt collection system and predict future problems.

There are three different ways you can protect your company from customer non-payment.

  1. Accounts receivable insurance is also called trade credit insurance or debtors insurance, and can facilitate your company both domestically and internationally. This type of insurance will cover your business if your customer suffers from poor business or accounting practices, bankruptcy, and even closure or change in ownership. Accounts receivable insurance will also cover non-payment for reasons outside your customer’s control, such as natural disasters, and political or economic problems. It will also cover you if your records are destroyed by fire or other types of insured events. Accounts receivable insurance does not, however, protect you from fraud or cover disputed invoices.
  2. Self-insurance means a company insures itself by creating a bad-debt reserve in order to internally cover customer non-payments. This method, however, denies a growing company the ability to use a large portion of its capital for investments and growth.
  3. Factors are companies that will buy your accounts receivables at a discount and perform the debt collections. You can also hire a factor to take over your entire accounts receivables and other accounting systems. This method, however, removes you from direct authority over your accounting, as well as a loss of personal contact with your customers and risks poor customer relationship management.

Accounts receivable insurance, however, is not for everyone. This type of insurance is for business-to-business enterprises only and does not cover retail or government accounts. Specialized retail insurance is available and includes coverage from loss of income due to negligent accounts receivables.

A company’s receivables can account for 40 percent of its assets and this type of loss is a serious detriment to a new and growing company. Accounts receivable insurance is the most secure and financially affordable way to guarantee your company’s future and customer relationships.

Accounts Receivable Insurance: Explanation of Accounts Receivable Insurance

Accounts Receivable Insurance: Why A Company Needs Accounts Receivable Insurance

The U.S. economy is still suffering setbacks from its recent recession and you still need to protect your business. When your business is new, you rely heavily on accounts receivables to pay your own creditors, to invest back into the company, and to move forward and become a stable entity.

  1. In addition to protecting you from negligent clients, accounts receivable insurers can also advise you on how to manage your accounting and bookkeeping practices more effectively. They are trained to spot trends in your current accounting and business practices that may lead to future problems and offer advice on how to avoid these potential problems. Your profits are your company’s lifeline and they need protection.
  2. Most lenders require accounts receivable insurance before they will approve a business loan. Most startup businesses rely heavily on a bank loan to get their business off the ground. A bank wants assurance that your customers will pay their bills even when you are a new business and have not yet established a strong and reliable customer base. In order for most lenders to approve the use of your business’s accounts receivable as collateral, or qualify you for a larger loan, your business must have accounts receivable insurance.
  3. If you want your business to trade internationally, accounts receivable insurance will reduce the risk in doing business with foreign companies. It will protect you from unforeseen problems, such as a country’s political or economic changes, natural disasters, or simply from bad or unregulated business practices. When your company’s accounts receivables are guaranteed, you can expand into international markets with a higher sense of security.
  4. Accounts receivable insurance will also allow you to take on bigger risks, such as larger contracts. If you have an opportunity to do business with a large corporation on a very large monetary scale, you can accept the contract and be secure in the knowledge that you will receive payment for your product or services.
  5. When you have accounts receivable insurance, extending credit to your current customers is much less risky. Extending credit aids in your customer relationship management and helps assure customers’ return patronage.

As a new or growing business, you are caught between safeguarding yourself from bad debts and bringing in as many clients as you can to build your business. Accounts receivable insurance allows you to do both at the same time.

Accounts Receivable Insurance: What Are The Costs Of Accounts Receivable Insurance?

Accounts receivable insurance is your most secure and most affordable coverage, compared to using precious capital to keep a bad-debt reserve, hiring a factor to assume control over your accounts receivables, or taking the chance that all your customers will pay their bills.

Accounts receivable insurance is very affordable; it is commonly less than one percent of your sales volume. U.S. domestic insurance costs between $0.10 and $0.20 per $100, and international insurance costs between $0.25 and $0.50 per $100. Your premium cost and your level of indemnity all depend on a number of factors:

Accounts Receivable Insurance: Why A Company Needs Accounts Receivable Insurance
  1. Accounts receivable collection history. If your company has a very poor history of collecting debts from your customers, this will increase your premium; however, if your history is very good, this will help decrease your premium.
  2. High risk. If you participate in a business practice considered a financial high risk, then your premium will increase. Examples of high risk include doing business within a politically unstable country, with a company that has a poor, or no, credit rating, or within an industry that is considered high risk, such as online gambling.
  3. Business management experience. Your education and experience in business and accounting will affect your premium rate. If you have a proven track record of responsible business sense and accounting prowess, your premium will be reduced.
  4. A large company. A large company with a higher accounts receivable portfolio will pay a lower premium than a smaller company with a smaller portfolio.
  5. U.S. economic state. During difficult economic times, U.S. accounts receivable insurers increase their premiums to offset the higher potential for company failures.
  6. International business. When doing business with other countries, a company has less control and less recourse to collect their debts. Therefore, international accounts receivable insurance is more expensive. International business risks include everything from unregulated business practices to political conflicts.

Other factors that will affect your accounts receivable insurance costs include your qualification for a possible zero-deductible policy or if you opt for a coinsurance policy. All these factors will affect your premium; however, incurring a cost that is much less than one percent of your profits in order to lower your financial risk while growing your business, is very affordable.

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