Trade Credit Insurance: Protection From Unexpected Trade Risk
Oftentimes, when credit and financial executives enter into discussions about trade credit insurance, a general assumption is made that customers with long time, positive trading histories will never default. Here are some typical responses from executives regarding the subject:
“I’m not worried about our major accounts, we’ve been doing business with these customers for years.”
“Our key buyers never miss a beat and always pay within terms, infact, we have great relationships with all of them.”
“If any of my top customers filed bankruptcy tomorrow, it would hurt not only my business, but every one of my competitors businesses as well. That’s the only insurance I need.”
While I can appreciate the confidence that financial executives have in their customers’ ability to pay their trade obligations, credit insurance professionals see an entirely different story. Nationally and around the world, businesses of all shapes and sizes are experiencing pressure from many sources - shrinking margins, higher operating costs, stiff competition, and poor collection recovery on their own receivables, to name a few. Any one of these conditions can develop into significant cash flow problems for a business causing that “perfect trading relationship” to fail unexpectedly. The fact is, a company’s ability to pay their trade obligations has very little to do with how large they are or how long a trading relationship has been established. Today’s economic and financial pressures can take down even the largest 800lb gorilla - and any supplier without protection on their accounts receivable could easily experience business interruption or outright failure, particularly in highly concentrated situations. Today, credit insurance professionals see business defaults more frequently as evidenced by the high volume of claims paid to policyholders.
Credit insurance companies protect their clients by maintaining current trading histories on companies worldwide, in real time, identifying which trading partners are currently late paying their suppliers. This critical business intelligence is updated monthly and provides an early warning system to suppliers worldwide. Due to the accuracy and frequency of the information reported, credit insurance companies are able to analyze trends, and identify the buyer(s) that have just stopped paying many of their vendors. Even if these defaulting companies continue to pay a handful of suppliers, history shows that they’ll probably stop paying all their vendors in the near term.
How valuable would this information be to the company that believes to have a stellar trading history with a key buyer but has no clue that the customer just stopped paying 20 of their other suppliers? Priceless - especially when the supplier realizes that they are probably next in line. Partnering with a reputable trade credit insurance company that has access to critical buyer information can help steer a business away from such financial exposure and be the safety net should a major loss occur out of nowhere. This kind of business intelligence combined with credit insurance protection makes smart business sense in today’s economic times.
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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