What is Credit Insurance?
The eighty percent trade out of an economy is conducted on open terms. However, it has far too little analysis is done with respect the effect of bad debt write-offs on the bottom. As a matter of fact, credit insurance protects businesses from non-payment of commercial debt. It makes sure that invoices will be paid and allowed companies to reliably manage the commercial and political risks of trade that are beyond their control. Therefore, capital is protected, cash flows are maintained, loan servicing and repayments are enhanced, and earnings are secure from these events of default.
Companies invest in trade credit insurance for a variety of reasons, including:
+ Sales expansion into new international markets.
+ A big improvement in financing terms.
+ The reduction in bad-debt reserves.
+ An actionable economic knowledge.
+ The protection against non-payment and catastrophic loss
Credit insurance is also widely used in export markets which is a complicated political environment. It can be a smart investment for many companies, but it may not be applicable to companies that sell exclusively to governments or retailers. In fact, the credit insurance of trade only run smoothly through receivable accounts . Hence, it is essential to invest in the trade of credit insurance program that summarizes costs associated with a risk business’s philosophy, sales restricted, systems, credit/financial information, receivable accounts management, collection and insolvency management. All of those are real costs and should be weighed against the cost associated with the credit insurance policy that these services are included as an added benefit. Consequently, the trade of credit insurance provides one of the best and most cost-effective solutions.
For example: Company A had $10M in annual sales and decided to use credit insurance instead of self-insurance.
– The realized profits by extending just one credit limit by $50K: $60K
– A released majority of bad debt reserves converted $160K
to earnings (first year only)
– Tax on remaining in bad debt reserves 20%: $8K
– Credit services – included :$0
– The cost of credit insurance stays 25% of annual sales: $25K
– Tax savings from deducting policy as business expense: $5K
–> ADDITIONAL PROFITS AND SAVINGS: $192K
Because of ongoing uncertainty surrounding the U.S. economic recovery, the unpredictability of budgetary decisions in Congress, the high rate of unemployment and weak consumer’s demands, the Eurozone crisis and ongoing tumult in the Middle East, the domestic and international economic climate is still very risky, which leads to require more vigilance from business leaders.
Ultimately, if an unexpected loss occurs, the trade of credit insurance policy provides indemnification. Thus, it is important to protect the policyholder’s revenue and the bottom line. For maintaining a strong relationship between the insurer and the credit management department, the trade of credit insurance may be the wisest investment so that the company can ensure its profits, cash flow, protect capital.
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