After the year that was 2020, many hope to see improvement in the coming year. 2021 won’t be without challenges, and finances will still be tight in the coming months. Add to this new tax provisions on the state and federal level, and many see bankruptcies or restructuring on the horizon.
Unfortunately, this may include your own clients—clients who happen to owe you money. It’s likely that in the past years, you’ve seen your cash on hand shrink, your accounts receivable balances grow, and the days receivables outstanding get longer. How would a customer bankruptcy affect you? How much could you lose, and how can you protect it?
With an average company holding 40% of its assets in the form of trade debts, there is a greater chance that a business will experience a loss within its accounts receivable than any other asset. The question, however, is how you can protect this.
To answer this, we look at a recent guide from new Controllers Council sponsor and the worldwide leader in trade credit insurance Euler Hermes.
What Is Accounts Receivable Insurance?
Accounts receivable insurance – sometimes called A/R insurance or trade credit insurance – provides companies with protection against customers that fail to pay what they owe. But how does it work and how can it protect you?
Accounts receivables are a critical component of your balance sheet — they directly affect your cash flow and profitability. But they are also high risk—especially in the wake of lockdowns. Like any other asset, you need to address the risks. You have business insurance, you have building insurance, and you put your cash in a secure bank—why not take steps to protect A/R balances?
Benefits of Accounts Receivable Insurance
Accounts Receivable Insurance answers this. Not only can it help companies protect themselves against non-payment risks and maintain their balance sheets, it can also help grow sales and obtain better financing terms. Here’s how:
- How A/R Insurance Helps You to Expand Sales: An accounts receivable insurance policy allows companies to feel secure in extending more credit to current customers, or to pursue new, larger customers that would have otherwise seemed too risky.
- How A/R Insurance Makes It Easy to Offer Better Terms for Customers: With access to extensive knowledge about the creditworthiness of new and existing customers, companies with accounts receivable insurance are able to avoid losses before they occur. In turn, you can avoid asking for cash on delivery or up front, making it easy to close sales.
- How to Get Better Financing for Your Own Business: If you have high A/R balances, especially from international clients, banks consider you a risk. However, if those balances are insured, you might be able to get better terms. Banks typically limit what you can borrow based on the perceived risk of international receivables, concentration of sales to large customers, or age of certain accounts.
Learn More: Trade Credit Insurance from Controllers Council Sponsor Euler Hermes
Though there are many benefits to securing your accounts receivable balances with trade credit insurance, these don’t come without cost— usually a fraction of one percent of sales on average. If you’re looking to take steps to protect A/R in 2021, we’d like to introduce you to our newest sponsor, Euler Hermes.
Whatever the future may bring at home or abroad, Euler Hermes can help you be prepared by predicting trade and credit risks and protecting your cash flow. Backed by Allianz and with more than 125 years of expertise, Euler Hermes’ global business intelligence is unrivalled.
Learn more about how trade credit insurance works here, and stay up with all the latest news and insights from the Controllers Council by joining today!