Accounts receivable insurance emerges as an indispensable partner for companies navigating the unpredictable terrain of trade credit. This specialized form of insurance not only fortifies businesses against the financial turbulence caused by unpaid invoices but also empowers them to extend credit to customers with confidence, fueling growth and fostering robust business relationships.
As globalization weaves increasingly complex interdependencies among businesses, the role of accounts receivable insurance in mitigating risks associated with customer default, insolvency, and political upheaval has never been more critical.
What is Accounts Receivable Insurance?
Accounts receivable insurance is a specialized type of policy for businesses that need protection against losses due to the non-payment of a trade debt. This type of insurance is also known as debtor insurance or trade credit insurance. Moreover, accounts receivable insurance is beneficial for companies that work on credit terms, offering protection against the risk of their customers failing to pay their invoices due to insolvency, protracted default, or political risks.
How Does it Work?
This insurance offers protection for various scenarios related to a company’s accounts receivable documents. It provides compensation for amounts that cannot be collected from clients due to the loss or damage of records from a covered disaster. Additionally, this insurance covers the interest charges on loans taken to make up for uncollected amounts.
This insurance also compensates for any additional collection expenses beyond the usual costs. Businesses typically have routine expenses associated with collecting debts, like the hours a bookkeeper might spend each month on payment reminders. Accounts receivable insurance steps in to cover extra costs incurred directly or indirectly from a loss, such as employing a temporary staff member to help with collections.
Moreover, accounts receivable insurance includes coverage for expenses related to recreating your accounts receivable documentation, like hiring an IT specialist proficient in data recovery.
While insurers might offer accounts receivable insurance as a part of an “extended coverage” rider on a property insurance policy, the coverage provided under such a rider may differ from a standalone accounts receivable endorsement due to potential exclusions related to buildings and personal property.
What Does Accounts Receivable Insurance Cover?
Accounts receivable insurance can cover a variety of scenarios, including but not limited to:
- Customer Insolvency: Protection against the inability of a customer to pay its debts due to bankruptcy or insolvency.
- Protracted Default: Coverage for situations where a customer is financially capable but refuses to pay within the agreed terms.
- Political Risks: Protection against losses arising from political events in the customer’s country. Such as war, revolutions, government actions preventing currency transfer, or the cancellation of export or import licenses.
- Export Risks: Coverage for risks associated with international trade, including non-payment by foreign customers for various reasons.
- Currency Inconvertibility: Protection against losses from the inability to convert foreign currency into the insurer’s domestic currency.
- Contract Repudiation: Coverage for losses if a customer cancels or refuses to honor a contract without a valid reason.
What Are Its Exclusions?
While specific exclusions can vary by policy and insurer, common exclusions from accounts receivable insurance might include:
- Disputes over Goods or Services: Claims related to disputes between the buyer and seller over the quality or delivery of goods and services are typically not covered.
- Credit Sales Beyond Approved Limits: Sales that exceed the credit limit set by the insurer for a particular customer may not be covered.
- Known Risks: If the seller is aware of the customer’s inability to pay before the inception of the policy, such losses may be excluded.
- Fraudulent Transactions: Losses arising from fraudulent activities committed by the insured or its employees.
- Indirect Losses: The policy may not cover indirect losses, such as opportunity costs or loss of market.
Who Needs a Policy?
All types of businesses will benefit greatly from accounts receivable coverage. This is especially true if you rely on or make constant use of electronic and financial records and payments from customers.
Small businesses that use thin profit margins, large organizations with costly services and products, and companies that are not allowed to carry out credit checks can consider accounts receivable insurance. Apart from this, you can consider this type of insurance if you are a global enterprise that carries out business globally or internationally.
How much does accounts receivable insurance cost?
The average cost of an accounts receivable insurance policy is not something that can just be searched for. On the contrary, the premium amount for this insurance type depends on various factors that will be considered by the insurance company or provider before the payment is made.
On average, the premium rate might range from 0.2% to 1% of the covered sales or receivables. However, for companies operating in high-risk industries or regions, the cost can be higher. It’s also important to consider that some policies may have a deductible. Or require the insured to cover a portion of any loss, which can affect the overall cost of the insurance.
Here are the factors that affect the cost of this insurance policy:
- Geographic location.
- Industry risks.
- Volume of sales.
- Economic conditions.
- Policy terms.
- Creditworthiness.
- Customer diversification.
- Claim history.
How to Obtain Accounts Receivable Insurance
Obtaining Accounts Receivables insurance generally involves the following steps:
Assessment and Application:
Contact an insurance broker or directly approach insurers that offer trade credit insurance. Provide them with detailed information about your business, including financial statements, accounts receivable aging reports, and details about your customers.
Risk Evaluation:
The insurer will assess the risk associated with insuring your accounts receivable. This may involve analyzing your customers’ creditworthiness and your business’s credit management practices.
Policy Customization:
Based on the risk assessment, the insurer will propose a policy that specifies the coverage, premiums, deductibles, credit limits per customer, and any exclusions.
Agreement and Premium Payment:
If you agree to the terms of your insurance policy and provider, you will sign the policy agreement and pay the premium.
Careful revision and examination of the policy details are necessary for businesses, and it is important to work with your insurance company to make sure your coverage suits your needs.