What is trade receivables insurance?
When an entrepreneur issues a customer an invoice with a deferred payment term, they must always take into account the fact that the contractor may not pay for the goods or service on time (or at all). This is a risk inherent in business activity, but it does not mean that one must unconditionally accept it. In a situation where you are not certain whether your contractor is trustworthy, it is worth thinking about additional security. Especially when the amount for which you are issuing the invoice is particularly high or you are just beginning cooperation with a given company.
Receivables insurance is a risk management tool that will allow you to maintain the profitability and financial liquidity of your company regardless of how your customer behaves.
As part of the service, you can take out insurance for part or all of the amount resulting from the invoice. The purchased policy constitutes a guarantee from the insurer, who offers compensation. It will be paid out if the recipient does not settle the payment by the designated deadline.
Important!
Pay attention to the insurer’s offer. The “designated deadline” mentioned above does not necessarily mean that the insurer will pay out compensation on the first day after the invoice payment term expires. As a rule, insurance companies offer payment of funds at a more distant date – for example, 7, 14, or 21 days after the payment deadline shown on the invoice.
If the insurer’s offer does not specify the moment of compensation payment, be sure to establish the details with them and ensure that the relevant information is reflected in the insurance contract.
Benefits of trade receivables insurance
Simple answers: peace of mind and money in case of problems, have long ceased to be sufficient – and rightly so. Here are the specific benefits you can count on thanks to insurance.
Protection against contractor problems
In theory, the financial difficulties of contractors should not be your concern. In reality, however, they can significantly affect the situation (not only financial) of your company.
Receivables insurance, provided you tailor it appropriately to your needs, will protect your company against unexpected contractor difficulties. Ordinary delays or non-payment, bankruptcy, or company restructuring – insurance can protect against each of these situations.
Assured financial liquidity
Contractors who are late with payments are a straightforward path to losing financial liquidity. When you are fulfilling orders for high amounts, even a single unpaid invoice can seriously harm the stability of your company.
Another risk may be excessive dependence on a single contractor. In a situation where your company carries out orders for a major player, it is easy to believe that they constitute a guarantee of continuity of orders and timely payments. However, when the contractor finds a cheaper supplier, your company may suffer seriously as a result.
The long-term solution is to expand the customer base, but if for some reason this is not possible or does not serve your brand’s interests, trade receivables insurance may be an appropriate way to ensure financial liquidity for your business.
Receivables monitoring
The possibility of insuring trade credit is usually associated with the option of launching receivables monitoring. This is a service through which the insurer continuously verifies the contractor’s situation and checks the current risk. Thanks to this, you can benefit from increasing or decreasing limits for specific customers.
Protection against an unstable market and political situation
If you trade with foreign recipients, you can take out insurance that also covers protection against market fluctuations and political upheavals in the contractor’s country. This is particularly important if your contractors operate in areas where the political situation is dynamic and can change at any moment.
The credibility of your business
Trade credit insurance is a signal to business partners or potential investors that you take your business seriously and are trying to prepare your company for every circumstance. Banks and other financial institutions may also take this into account in the context of financing your company in the future.
How to choose the best insurance offer?
Before you choose an insurance company to cover your company’s trade receivables, you will certainly check the offers of many of them. To make a thorough assessment of what insurers offer, pay particular attention to the following issues. Ask the insurer specific questions.
What is the exact scope of coverage? What about political risk?
Insurance can cover significantly more situations than simple payment delays. Check whether you will receive compensation also in the event of company restructuring or bankruptcy.
If you trade with foreign contractors, especially those operating in countries where the political situation is unstable, check how the insurer approaches the issue of political risk. Remember, however, that in such a case the cost of receivables protection will be significantly higher.
What limit amounts does the insurance company offer?
Verify what limits the insurer offers. Take into account an appropriate “buffer” – if you already need to insure receivables for an amount of 300,000 PLN, look for an insurer that is able to cover receivables for higher amounts.
Also check how and how quickly the insurer assesses the creditworthiness of your customers. Make sure whether it is possible to change limits during the term of the contract and whether this involves additional costs.
What are the compensation payment deadlines?
If you care about insurance against payment delays, make sure the insurer pays out compensation relatively quickly. Check within what timeframe you should report any delays in order to receive the insurance funds as quickly as possible.
What additional services does the insurer offer?
Make sure who is responsible for monitoring contractors. Perhaps the insurer offers such a service, meaning there will be no need to report delays? Pay attention to the scope of receivables collection services offered and the criteria for contractor analysis.
What compensation amounts can you count on?
Although insurers often boast slogans suggesting that insurance solves all problems related to contractor insolvency, it is in reality unlikely that the full amount of receivables will be recovered at 100%.
Insurance companies most commonly offer compensation of 75–90% of the invoice value. The final payment amount is also influenced by the risk borne by the insurer – the more risky the transaction, the lower the percentage of loss coverage.
What insurance costs will your company incur? What beyond the premium amount?
Only once you know the answers to all of the above questions should you verify the costs. A promise of a low premium will not mean much if it turns out that the offered variant lacks many services your company needs. Pay attention to what components affect the amount of the insurance policy fees. These are usually:
- Type of business activity – the more risky the activity, the higher the premiums. Do not hesitate to ask a representative of the insurance company which branches of the economy are considered high-risk industries, as the situation may change over time.
- The credit limit amount – the more expensive the receivables you want to insure, the more you will pay for the policy.
- Financial analysis of contractors – the more stable the financial situation of your contractors, the lower the insurance fees awaiting your company. During the risk assessment, insurers analyze not only the credit history or current financial situation, but also the mood in the industry or on a given market.
How does trade receivables insurance work step by step?
An entrepreneur who wants to insure trade receivables must conclude a contract with an insurer that offers such a service. Before this happens, however, it is worth preparing appropriately.
Step 0: draw up a list of contractors
Before the first contact with the insurance company, prepare a list of companies with which you already cooperate or intend to enter into cooperation. You can, of course, insure all trade receivables – if, however, you conduct business on a large scale and have many contractors, the costs of such a service may prove very burdensome for the company’s budget.
In such a situation, a better solution may be to divide contractors into at least two categories:
- trusted recipients who have not had solvency problems so far,
- new or unverified contractors whose receivables you want to insure.
Present this second list to the insurer during the first contact.
Important!
You can also – for your company’s own purposes – create a more detailed division of contractors, for example according to the average transaction value or the average debt repayment time. If you keep such records accurately, it will give your company a broader perspective, making it easier to decide which trade receivables are worth insuring.
Step 1: choosing an insurer and submitting the list of contractors
Before choosing the insurance company whose services you wish to use, send requests for quotes to several of them and compare the offers. What matters most is primarily the amounts for which you issue invoices, how far you defer payment terms, and the financial situation of your contractors.
The insurance company will carry out a risk assessment for each of the contractors submitted for verification.
Step 2: obtaining a limit and signing the contract
The insurer – based on the verification carried out in the previous step – will propose a credit limit to your company, assigned to a given contractor. In this way, you will find out up to what amount you can insure the trade receivables of the companies you work with.
If you accept the insurer’s terms, all that remains is to sign the contract and then proceed to further steps.
Step 3: issuing invoices with deferred payment terms
At this stage, you can already freely extend trade credit to the recipients you previously submitted for insurance. This will increase the attractiveness of your company in the eyes of contractors, who will gain longer payment terms.
Step 4: receivables monitoring
This is a “passive” step – it does not require any action on the part of your company. At this stage, it is the insurer who keeps their finger on the pulse: continuously checking and analyzing the finances of your contractors and estimating the risk of insolvency.
Step 5: reporting delays
If a contractor does not pay on time, you have the right to submit a claim to the insurance company. Your submission will be processed, analyzed, and you will then receive the agreed compensation – provided the insurer does not find any irregularities.
Remember to submit the claim in accordance with the terms of the contract. In this way, you can avoid unnecessary stress. A correctly submitted claim will allow your company to maximize the chances of receiving compensation without obstacles.
Step 6: payment of compensation
If in the previous step everything went according to plan, your insurer will be obligated to cover the losses. The funds that entrepreneurs receive as part of trade receivables protection amount to usually around 75–90% of the receivables amount. The conditions can vary, however, which is why it is so important to devote some time and energy to conducting a thorough comparative analysis of insurance offers.
Summary
Trade credit insurance is a way to protect your company against the risk of not receiving payment. Remember, however, that insurance does not protect against all situations – take this into account when choosing an insurance company.
A policy can guarantee the payment of compensation both in the event of a contractor’s delay and in the case of bankruptcy or restructuring, however the detailed terms of the insurance should be established with the insurer so as to leave no room for doubt.
