Bad Debt and the Risks
A large part of the effort within a business goes into effectively managing accounts receivable. This concept is fairly simple -- if the money is outside of the business, it’s not helping the business grow. The longer a debt remains unpaid, the higher the chance is that it becomes unrecoverable, making it a bad debt. Bad debts can be detrimental to your business and its bottom line. Some of the risks of bad debt to a business include:
-Reduced Profit Margin: Bad debts are deducted from a business’s sales revenue. If enough bad debts are absorbed, a business could be looking at financial losses.
-Difficulty in Obtaining Loans: Obtaining loans is one of the financial obligations that can become difficult with rising bad debts. Cash flow issues in general become troublesome with bad debts in the mix.
-Prevent Growth of a Business: With the inability to secure loans and not optimizing cash flow, a company will be hard-pressed to expand and grow. Investments in bettering the business, like product development and technology, can’t happen without significant funding, resulting in the halt of growth and expansion.
-Increased Risk of Bankruptcy: Bad debts can snowball with cash flow issues to create a cash-flow crisis. This puts a business at high risk for insolvency; small businesses are particularly susceptible to insolvency as an effect of bad debts.
Accounts Receivable Insurance and the Solution
In order to avoid the above risks of bad debt, along with others, businesses should look to accounts receivable insurance, also known as trade credit insurance, to cushion against the losses if they find themselves unable to collect from debtors.
Being unable to collect payments from customers ultimately will lead to having to self-absorb the loss. In a 2018 report, over 64% of businesses said their overdue invoices had increased from 2017 and that 49.6% of debtors did not pay on time due to lack of funds. These statistics, in tandem with a handful of other shocking figures, won’t necessarily stop businesses from extending a client’s credit, for fear of reducing their sales. The solution to avoiding the inevitability of bad debt is accounts receivable insurance. Accounts receivable insurance can aid businesses with the following:
1. Mitigate the risk of non-payment due to protracted default, insolvency, losses due to political risk, etc.
2. Help to grow business with new clients without taking on excessive new risks with unknown payment history
3. To help improve collateral quality which in turn will entice lenders to provide higher advance rates and more favorable terms to finance short term working capital needs
4. Reduce concentration risks to individual customers or country concentrations
Are you ready to grow and protect your business? Impello Global is a trade finance advisory boutique and trade credit and political risk insurance brokerage, headquartered in Seattle, Washington. We specialize in trade credit and political risk insurance and provide advisory services to companies and lenders who are looking to expand their trade finance capabilities.
If you are a company or a lender trying to better understand trade credit insurance or looking for guidance as to how trade credit insurance can help improve working capital financing, our team would be delighted to learn more about your business and discuss options available to you. Please visit our website at www.impelloglobal.com or contact us directly at info@impelloglobal.com.