Bad debts could pose a serious issue for the company despite its attempt to avoid them. However, there are various ways through which the company can manage the risks associated with dangerous debt – one effective way is trade credit insurance.
Irrespective of how big your company is, it is essential to buy trade credit insurance. There are various tactical and strategic reasons why these companies should purchase trade credit insurance. And once they purchase, why they should stick to it.
Let’s have a look at some of the reasons to purchase trade credit insurance.
1.Bankruptcy of Clients
Bankruptcy is the reality of today’s business world, making full-collection on the invoice a daunting task. Further, most of the banks know this, and therefore, they urge their customers to purchase trade credit insurance. It gives them the surety, and they feel more comfortable while lending.
2.Foreign Trade Issues
There are various issues, like cultural, communication issues and other unforeseen cancellation of permits, etc.; which can arise when you perform a global trade that will not only prevent but also delay payment. Then some disruptive global trade events can take the form of global political events, government interventions and currency issues, which can affect your payment which you are expecting from your customer. Therefore, it is essential to go with a trade credit insurance to get the complete coverage.
In those situations when a business opportunity for high sales arises, it is imperative to respond to it as quickly as possible. Companies need that kind of capability to thoroughly and quickly analyse the financial stability of their potential customers. Otherwise they would miss the sales opportunity.
Here, a trade credit insurance policy can offer that kind of service by accessing the wide information databases for a quick assessment of the customer’s viability, including trading history and solvency, risk. On an on-going basis, the trade credit insurance company can assist you by monitoring critical accounts, and as a result, you will not need to do the same in-house.
A trade credit insurance gives you a chance to quickly match your competitor’s credit limit and pay terms. If your rival offers Rs 50 lakh line of credit with 120-day terms, and your company can only give Rs 10 lakh with 60-day terms, who would get the business? Thanks to trade credit insurance, you would be in a better state to extend lucrative trade credit limit to your buyers.
To achieve success and growth, companies need to be organizationally aligned and focused more on growing their business. Here a trade credit insurance can play an effective role in bridging the gap between the sales department and the credit department— two main areas which are at odds. Further with the help of trade credit insurance, it is feasible for companies to streamline their account receivables and collection department. In this way, the department can pave more focus on daily issues and leave the credit monitoring and evaluation work to the trade credit insurance company. Further, trade credit insurance also provides a conducive and stable environment for sales and marketing team to explore global markets.
Also read: Trade Credit Insurance Keep Business Afloat
In most of the companies, receivables represent a substantial part of their balance sheet assets, and therefore, have a severe impact on its cash flow and how banks & investors look up to its financial viability. Ironically, in most of the company’s assets on a balance sheet, like equipment, facilities and even inventory, are insured. However, oddly its largest balance sheet and receivables are often not insured. A company can certainly achieve better financial terms and a lower rate of interests if its receivables are completely secure. It can also help in avoiding the catastrophic bad debt losses and assist in reducing or eliminating the bad debt reserve.
If employed well, a trade credit insurance can prove to be a strategic advantage. A trade credit insurance is there to let you sleep better at night, and that says all!