Trade Credit Insurance: Sales Expansion Opportunities
A properly structured trade credit insurance program offers many benefits to policyholders. In addition to having catastrophic loss protection on accounts receivable caused by customer bankruptcy, slow, or non-payment default, and having immediate access to investment capital from lenders at very attractive advance rates, many company executives also use trade credit insurance as an effective sales expansion tool to grow sales revenue and increase market share.
When a company’s accounts receivable portfolio is insured with a trade credit insurance company, the insurer establishes credit limits on key customer accounts based on the most current proprietary financial information available. Risk analysts evaluate this data and determine credit limits based on the risk grade of the buyers, and often times when a positive risk grade is determined, credit limits can be set at higher levels than the credit limits previously set by the supplier. The difference in these credit limits is an opportunity for policyholders to sell more products and services to these buyers, instantly increasing sales revenue without taking on additional risk. Companies that have been too credit restrictive previously trying to cap their exposure can now enjoy higher credit limits and sell more to existing customers with confidence.
For companies that export to other countries, sales expansion opportunities become even more apparent. With a trade credit insurance policy, not only can exporters sell into new international markets that may have been too risky in the past, they can also completely eliminate the need of using Letters of Credit and sell on open terms to international buyers. This benefit of trade credit insurance allows companies to win more business from competitors who still use LC’s which are expensive, time consuming, and not the preferred choice for many international buyers.
Sales Expansion Opportunity Example
Credit Limit Established by Internal Credit Department: $500,000
Credit Limit Established by Credit Insurance Company: $750,000
# of Turnovers Per Year: 8
Revenue Increase: $2,000,000
Gross Profit Margin 7%
Impact on Sales Expansion: $140,000
The net impact here is $140,000 in gross profit on this one account due to a higher credit limit set by the insurance carrier.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact Jack Trama directly by clicking here.
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