What do you do when your largest customer goes bankrupt? Panic? Probably. But, once the immediate panic subsides, some smart business owners call their insurance company and put in a claim under their “accounts receivable insurance” policy. Accounts receivable and other similar trade debt make up a significant portion of any small business’s assets, and business owners are often unaware that they can be insured. These policies may cover about 90% or more of the lost revenue due to a customer’s bankruptcy or other covered events.
Trade credit insurance is a risk management tool that protects businesses from many of the risks involved in extending credit to customer. Moreover, businesses insured with trade credit insurance often find it easier to obtain financing against their assets and, have also used such policies to increase sales through new lines of credit and extensions to new and existing customers or to pursue new, larger customers that would have otherwise seemed too risky.
This protection also allows companies to strengthen cashflows without the increased exposure associated with customer defaults. Banks are more likely to extend financing to companies with stronger balance sheets, and may consider the existence of such insurance in determining whether to increase or expand the insured’s credit limits. Businesses would be well advised to talk to their insurance broker to determine whether this type of insurance makes sense considering their customer mix, accounts receivable exposure, and the need to obtain more financing or credit. For legal advice about this business management tool or other business issues, contact our business lawyers, PLDO Partner Brian J. Lamoureux at [email protected] or Attorney Christopher F. Homsy at [email protected] or call 401-824-5100. We welcome your comments, questions and suggestions.