Scenario - Insuring Domestic and Foreign Receivables
Having explored the benefits of insuring domestic and foreign receivables independently in our prior posts (domestic example/foreign example), let’s now look at the benefits of insuring all receivables. Below is an example of a typical borrowing base with both uninsured domestic and foreign receivables.
Without Insurance
Gross Domestic Accounts Receivable $7,000,000.00
Less: Ineligible Accounts Receivable $2,100,000.00
Net Eligible Domestic Accounts Receivable $4,900,000.00
Maximum Advance on Eligible Domestic A/R (75%) $3,675,000.00
Gross Foreign Accounts Receivable $3,200,000.00
Less: Ineligible Foreign Accounts Receivable $3,200,000.00
Net Eligible Foreign Accounts Receivable $0.00
Maximum Advance on Eligible Foreign Accounts Receivable (0%) $0.00
Total Margined Eligible Accounts Receivable $3,675,000.00
Now, let’s look at the same borrowing base and assume that all of the receivables are insured. By insuring all of the receivables, lenders will often advance up to 90% on eligible domestic and foreign receivables and will include previously ineligible items such as receivables with longer payment terms and concentrations. As shown in the below example, eligible collateral increased by over $5.2 million and availability increased by over $4.3 million.
With Insurance
Gross Domestic Accounts Receivable $7,000,000.00
Less: Ineligible Accounts Receivable $900,000.00
Net Eligible Domestic Accounts Receivable $6,100,000.00
Maximum Advance on Eligible Domestic A/R (90%) $5,490,000.00
Gross Foreign Accounts Receivable $3,200,000.00
Less: Ineligible Foreign Accounts Receivable $400,000.00
Net Eligible Foreign Accounts Receivable $2,800,000.00
Maximum Advance on Eligible Foreign Accounts Receivable (90%) $2,520,000.00
Total Margined Eligible Accounts Receivable $8,010,000.00
Conclusion
Accounts receivable are often the largest asset on a company’s balance sheet and therefore, a focal point for collateral to support working capital loans. Companies who use trade credit insurance as a financing tool often find that it is an inexpensive solution to finance their working capital need. By leveraging existing assets to increase collateral support, companies are frequently surprised at the additional credit availability they are able to obtain. In the examples above, by insuring its receivables, the company was able to improve the quality of their collateral and therefore, the lender was willing to provide higher advance rates against that collateral. As a result, credit availability increased from an uninsured amount of $3.65 million to an insured amount of over $8 million.
For companies in need of additional credit availability or lenders looking for ways to provide their borrowers with more credit support, trade credit insurance may be the solution.
About Impello Global
Impello Global is a trade finance advisory boutique and specialty trade credit and political risk insurance brokerage, headquartered in Seattle, Washington. We specialize in brokering trade credit and political risk insurance and also provide advisory services to companies and lenders who are looking to expand their global trade capabilities. Please visit our website at www.impelloglobal.com or contact us directly at info@impelloglobal.com.