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Protect Your Account Receivables Against Economic Uncertainty

Economic uncertainty can be a death sentence for an otherwise healthy business. Domestic variables are not the only factors that an organization must consider when protecting its financial stability. Indeed, a recent survey from Sun Life Financial found nearly two-thirds of Canadians worried about the impact that the U.S. "fiscal cliff" would have on Canada's economy. Combined with continued turmoil in the Eurozone, Canadian companies would be wise to take action to protect what is often their biggest asset: trade receivables.

When your customers are based overseas or their revenue is dependent on foreign business and global markets, it can be difficult to insulate your accounts receivables from worldwide volatility. However, investing in trade credit insurance may make it possible for your business to transfer this external risk and gain greater control of receivable losses. Trade Credit Insurance is also a great risk management tool for an organization's domestic receivables.

The process of protecting your credit

The steps to start protecting trade credit are simple, beginning with a straightforward application. From there, your company will have to provide an electronic aged receivables listing and have a short conversation that hammers out the details about credit protection and what business strategies it can support.

Once this stage is complete, your business will be sent a management report, which outlines:

  • Strategic benefits that stem from alternate credit protection solutions
  • Alternative approaches that you can adopt to lessen the risks your clients may present

Benefits of hedging against unexpected debts

Trade credit insurance enables you to gain insight on bad debt costs and variability, resulting in more accurate forecasts. Other benefits may include:

  • Providing a hedge against the negative impact if the economy slips into a recession. Note, however, that insurers may remove coverage on a buyer if they feel it becomes an unacceptable risk, i.e. poor payment history, risk of insolvency, etc. Therefore, in recessionary times coverage on several buyers can be limited or unavailable.
  • Cancelling the credit risk uncertainty of engaging higher risk foreign markets in credit sales.
  • Setting a maximum on bad debts, which helps you steer clear of major, one-off losses if a large client defaults or a certain foreign market or industry segment falls apart.

The benefits do not stop there

Companies that apply for credit insurance often enjoy more than reduced risk. HUB notes that the coverage not only offers greater insight into receivables quality, but also sheds light on benefits such as:

Higher revenue

With trade credit coverage, your business can feel more assured that it will get paid regardless of which markets it operates in. It may even empower the organization to pursue new clients in foreign countries, boosting your competitiveness and revenues.

Lower bad debt allowance

Bad debt does nothing for your company except tie up cash flow and prevents you from applying capital resources toward more productive activities. The self-insurance route is not the best way to hedge against losses from bad debt: credit insurers actually help thin out credit risk by spreading it among many customers.  

Better financing from banks

As HUB has found, having credit insurance can give banks more assurance in your business, and it boosts their primary security. This results in higher advance rates, totaling up to 90 percent of the qualifying receivables.

Build upon your existing credit insurance programs for greater results. A HUB consultant can help you determine how this coverage plan can provide maximum returns. Talk about how you can improve your coverage and achieve larger limit requirements. Brokers who specialize in credit insurance and underwriting can help you manage and vet claims, in addition to helping your company negotiate your insurance renewal.