How Trade Credit Insurance Can Help Your Cash Flow

business cash flow strategies

What is it?

Trade credit insurance (TCI) is insurance that protects your accounts receivable should a customer not pay you due to default or insolvency. In some situations, the insurance company will assess the credit risk of your customer before agreeing to insure the transaction and help you collect the debt should the customer not pay by the due date.

There are many types of TCI, and some policies specialize in protecting you when selling to foreign customers. AIG is a leader in TCI, so view their page here to see all the types of policies they offer. For small and midsize businesses (SMBs), the policies below are the most relevant:

Accounts Receivable Insurance - This protects your accounts receivable portfolio (which is an asset on your Balance Sheet) as a whole.

Top Accounts/Single-Buyer Policy - This protects you from non-payment by a single key customer, and the policy is available for both short and medium terms.

Trade Credit Insurance - This protects sellers of goods and services due to customer default, insolvency or events that prevent contract performance. This insurance protects single transactions or contracts.

How Trade Credit Insurance Can Help Your Cash Flow
Photo credit: http://trafalgar-intl.com/

What are the benefits of TCI?

  1. Balance Sheet protection - Your accounts receivable is an asset on your Balance Sheet, and TCI make sense when accounts receivable is your largest asset. We know you should insure your fixed assets such as buildings, equipment and automobiles, so it follows to insure your accounts receivable.
  2. Cash flow relief - When a key customer or large contract is not paid, this could dry up cash flow and cripple your company.
  3. Access to new markets and sales growth - If you want to expand your sales to a new market in which you are not familiar or a sell to foreign customers, this insurance protects you as you take this risk.
  4. Access to better and more working capital (loans) - TCI provides additional assurances to banks that you will have cash to pay back loans. With TCI,  you may be able to secure additional loan funds to grow your business and invest in capital assets.
  5. Protection from large exposures with key customers - Oftentimes, you will land a "big" client, and this client represents 30%-50% of your cash flow and revenue. The dependency on one client for most of your cash flow makes you extremely vulnerable.
  6. Faster and better credit decisions - If your decision of whether or not to extend credit to a customer relies on credit checks and risk assessment, you or your employees need to spend time doing this. Outsourceing this function on to the insurance company can save you time and money. The insurance company is invested in doing a good job assessing the customer's credit risk.
  7. Reduces the Allowance for Bad Debt expense - If you present financial statements on an accrual basis, you should report an expense item of Allowance for Bad Debt on your Profit & Loss Statment. This expense item estimates the dollar amount of accounts receivable that you do not expect to collect due to customers not paying you. Allowance for Bad Debt on your P&L reduces net income. If you have TCI, you can show less Bad Debt Allowance, thus increasing the net income number.
  8. Provides cost-effective collection agency services - Before the TCI insurance company pays a claim for bad debit, it will assist you in collecting the bad debt. 

Where can I find out more?

AIG

Euler Hermes

International Credit Insurance & Surety Association

Trafalgar (their page on TCI provides a great explanation)

Cash Flow Signals has a playlist of videos on TCI in its YouTube channel.


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