The Current Situation
So far this year, it has become harder for corporations of all sizes to acquire capital due to rising interest rates. The increased difficulty in finding capital causes insolvencies to increase, making it more risky to do business both domestically and internationally. In order to manage these risks, it is recommended to insure your accounts receivables for three main reasons:
Provides Credit Protection
The first and most obvious benefit of insuring one’s accounts receivables is that trade credit insurance provides protection against buyers that become insolvent due to inflation/rising rates. With TCI, insurers will often provide advances up to 90% of the value of the invoice. This provides peace of mind to your business knowing that the vast majority of your shipment is guaranteed to be protected.
Increases Likelihood of Acquiring Credit with Favorable Terms
The second and less widely known benefit of having trade credit insurance during periods of economic uncertainty is that it is much easier to acquire capital, increase borrowing capacity, and secure better credit terms. This is because businesses look much more attractive to banks and suppliers once they see that AR is insured because it guarantees payment even in the event of a debt default. For example, if a company makes over 80% of its revenue from 1-3 clients, chances are it will have a hard time finding a lender due to high concentration risk. Certain types of trade credit policies (such as key account or single buyer coverage) can partially ameliorate the concentration risk, allowing the company to focus on growing its revenue instead of securing financing.
Increased Access to Data
Many AR insurance providers give clients access to thorough and up-to-date information about an organization’s clients and market trends. This can give your company a significant advantage in assessing its financial situation and adjusting credit terms accordingly. Trade credit insurance providers will also provide assistance in collecting unpaid invoices on domestic and foreign accounts.
The Bottom Line
During periods when interest rates rise, it may be difficult for certain businesses (especially those with high concentration risk) to acquire capital. Trade credit insurance can help ease this risk and provide other benefits that can help clients navigate tough economic headwinds. These benefits include providing credit protection, improving the likelihood of securing better terms, and increased access to data. For more information about how to acquire trade credit insurance, visit impelloglobal.com or email us at: info@impelloglobal.com.