Securing Trade Risks with Credit Insurances
23-04-2021 5 min read
For many businesses, selling goods and services on credit terms is a common practice, which, however, enjoys little legal protection. Accounts Receivable is the largest asset on the balance sheet of most companies. However, getting the cash in hand is not always a sure thing since customers may lag in paying their due balances or go bankrupt and default on payment altogether. Bankruptcies are part and parcel of today’s economy and each invoice that remains unpaid is a risk to a business’s solvency and liquidity.
Companies selling goods or providing services on credit terms can protect their business against the risk of customer non-payment with credit insurance. When a business has credit insurance, it is reimbursed for any insured receivables that cannot be collected. If a business is covered for "Protracted Default", it is protected not just against customer non-payment but also against significantly late payments. Companies can also insure their manufacturing risk, i.e. the risk of customer bankruptcy during the manufacturing phase. Credit insurance secures a business’s liquidity and is a trusted way of preventing late payments from translating into cash flow shortages, drop in revenues or even bankruptcy.
Substantial Benefits – Complex Handling
While credit insurance offers valuable protection, it also presents companies with challenges of its own kind, not just with a view to the cost resulting from premiums but also with regards to the high administrative burden involved in managing credit insurance. Limits are requested through the Internet and the information is maintained manually in the organization’s system. Companies also need to take care to comply with their contractual obligations toward the insurer since their failure to do so can result in the loss of their credit insurance cover. One such obligation is notifying the insurer of any late or non-payments and extensive effort goes into gathering the data needed for these notifications and submitting them to the insurer.
Companies also need to put a lot of work into gathering the information needed for declaring their balances or turnover – whichever their premium is based on – and submitting them to the insurer by a specified deadline. Reports on which receivables are insured and which are not are practically not available in the system or can only be created with enormous effort. All activities related to managing a company’s credit insurance are usually done manually, which places a high administrative burden on their business.
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