In a perfect world, your business would be comprehensively and fully insured against every possible risk you could ever think of.
Regardless of whether your business was the target of thieves or vandals, experienced fraudulent behaviour by employees, was inundated in a flood, or had customers that didn’t pay their bills, you’d be able to carry on operating.
Many businesses choose their insurance policies based on how much the premiums cost, before considering what’s covered in the policy.
However, there’s an interesting paradox in this situation. If your business needs to minimise the amount it spends on insurance premiums, that indicates cash flow is precious and the business needs to protect it. This means you could be failing to insure the very thing your business relies on to survive – cash flow.
Trade credit insurance protects your business when customers fail to pay. It can help keep your cash flow healthy even when the revenue you expected isn’t forthcoming. Insuring your accounts receivable can help you operate with more confidence, knowing that your cash flow won’t be disrupted even if your customers don’t pay.
However, many businesses avoid taking out trade credit insurance because of a misperception that it’s too expensive or that their business can’t afford it.
The truth is, trade credit insurance is probably much more affordable than you think.
The cost of trade credit insurance is calculated based on a percentage of your turnover combined with the level of risk. That means every policy is priced according to the individual business’s circumstances and requirements.
For example, if your business has a very low level of risk, the premium may be lower than a business with high-risk customers or operating in a high-risk industry. Furthermore, if you elect to take on more of the risk, you can reduce your premiums even further.
It’s also important to recognise that trade credit insurance isn’t a single product, it’s just a term used to describe this type of insurance. There are many products available, and each one is designed to suit a different need.
For example, Atradius offers a small business product (Modula First) for businesses with revenue below $5m, this premiums ranges from $4,550 to $9,995. It also offers insurance designed for larger businesses with significant domestic and/or export trade, with turnover greater than $5 million. The premium for this product (Modula) is typically less than 0.25 per cent of the turnover you insure, so when you consider this small percentage in context with the amount you stand to lose if you experience a bad debt, you can quickly see how a trade credit insurance policy can benefit your business.
To put this in perspective, here is a very simple calculation so you can see how it works:
Industry: IT Services Provider
Turnover per year: $10 million
Credit Insurance Policy Rate: 0.10%
Total Premium (excluding fees and taxes): $10,000 per year.
There are products suited to multinational businesses operating from multiple locations around the world, as well as special products designed to cover events and situations that arise outside your control.
Trade credit insurance providers can also add significant value to your operations by providing comprehensive market information that helps you make smarter, less-risky decisions around which customers to work with. Your trade credit insurance provider can perform due diligence on prospective customers so you can determine whether to offer them attractive payment terms or require cash-on-delivery arrangements.
The value this can provide to your business could outweigh the cost of the premiums, not to mention the peace of mind you can gain just by knowing that the next time a customer doesn’t pay, it’s not money out of your bottom line.
If you keep that in mind, the cost of trade credit insurance could be much lower than you think.
To find out how Atradius can help you get the right trade credit insurance for your business, contact us today or your specialist trade credit insurance broker.
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