Credit management is an important aspect of any business. This is because credit management techniques can affect how much cash is available or isn’t available for operational activities. Thus, you may want to consider acquiring trade credit insurance.
What is trade credit insurance?
This type of insurance provides risk mitigation for manufactures or business owners against debtors who may default on their debts. The insurance providers will pay a certain portion of the debt depending on the type of cover purchased, and thus the business is assured of recovering a good part of the money it would have otherwise lost.
Why is trade credit insurance important for some businesses?
At the heart of credit management is efficient working capital management. Working capital is the money a business needs to conduct its day to day activities. This would be paying daily expenses or purchasing raw materials for the business. Put simply, the working capital available is the balance of money one has that is readily accessible. Breaking this down into its component parts, this would be the balance left when a business has received money from their debtors, the amount they have borrowed from a bank or some other lender, less the amount used in paying off their debts to their creditors.
Consequently, typical business attempt to lengthen the maximum allowable period to pay off their debts so that they can have money for as long as possible which may be used in purchasing assets or paying off other expenses. On the flip side, businesses want to shorten the period their debtors take to pay them for their goods and services to provide the capital necessary for the business to run effectively. It follows that if your debtors don’t pay you back in good time then you risk a dysfunctional business.
Benefits of trade credit insurance
Since the insurance policy is basically a risk mitigation measure, this give business owners the confidence to expand their business to other potential customers with the knowledge that their credit is safely secured with the insurance providers. This does not imply that one should conduct business without any form of due diligence, but it does make easier to conduct business with new customers
Lower debt levels
If your debtors are not paying you in good time, then your business is forced to take up debt. This will definitely increase your expenses as you are forced to pay interest on your loans.
Better credit ratings
If you take up trade credit insurance, then lenders will be more confident in giving you debt as they know that your debtors (your source of income) are insured and can, therefore, can more confidently predict your expected cash flows.
This also has the effect of lowering interest rate levels since you’re a safer bet than providing credit to a business that is uninsured. This may be especially useful for businesses seeking funding.