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Business credit insurance (a.k.a. bad-debt insurance, trade credit
insurance, export credit insurance, commercial credit insurance, and
other industry or country specific names) is a specialized type of
property and casualty insurance that offers companies protection against
the financial consequences of customer bankruptcies, insolvencies, bulk
sales, liquidations, and other country specific business failures. Most
policies also cover undisputed slow-paying accounts (protracted
default).
Basically, Business Credit Insurance guarantees businesses against
excessive bad-debt losses due to their customers' inability to pay for
goods and/or services provided on open credit terms.
Export business credit insurance can also provides political risk
coverage.
Business Credit Insurance has been available in the
United States since the late 1800's).
The first two companies to offer business credit insurance in the United
States were:
1.
American Credit Indemnity which has evolved into
Euler Hermes ACI.
2.
Continental Credit Insurance which has evolved into
Coface USA.
Both companies are respected leaders in global business credit insurance
and related international business products and services (mostly credit
related). The United States government offers export credit insurance
through the
Export-Import Bank of the United States.
In addition to these two companies and the U. S. Government, there are
only a few other serious providers in the United States. Some of them
offer services not available from these companies or the government.
Even though there are not very many solid providers, there are many ways
to structure a business credit insurance policy. A good Business
Credit Insurance Broker can help with that. A good broker knows how
to structure the policy to offer the "most bang for the bucks". A good
broker that specializes in business credit insurance also knows which
insurance provider is best suited for the risks involved (the different
providers' appetites for certain risks change from time to time). If
needed, the broker can "shop" for the best coverage, structure, and/or
premium. If financing is needed, most brokers can help with that.
Most business credit insurance providers offer policies through company
agents and/or insurance brokers. The company agents work for the
insurance company selling their company's products. A Business Credit
Insurance Broker works for the insured to achieve business goals by
assisting in finding the best company with the best policy structure to
meet the specific needs and goals of the insured. A good broker also
assists in many other areas throughout the life of the business credit
insurance policy.
Using a business credit insurance broker cost the insured nothing.
A business could enlist the assistance of a Business Credit Insurance
Broker at no cost and if the broker doesn't do a good job, fire them. Of
course, if the business finds a good Business Credit Insurance Broker,
the relationship should grow and last for many years.
Businesses buy business credit insurance for a variety of reasons. Some
of these reasons are:
·
Increased sales
- The business is able to safely extend higher credit limits to existing
customers. They can also offer open credit terms to new and unknown
customers in new and unknown locations (domestic and/or export).
·
Improved Cash Flow and/or Working Capital
- Businesses can use their insured accounts receivable as collateral
with asset based lenders and/or factors. Business Credit Insurance +
Accounts Receivable Financing = Safe and significantly improved cash
flow.
·
Third Party Credit Guidance
- Most business credit insurance policies cover the larger customers by
name for a specific credit limit. Because of the providers' clout, in
many cases they have access to proprietary credit information. If the
insurance company learns of derogatory credit information about these
customers, they notify the insured to hopefully avoid or lessen
potential losses.
·
Add value and stability to their financial statement
- Accounts receivable, typically represent 40% or more of a company's
assets. Business credit insurance gives that asset a more tangible
value.
·
Become more competitive
internationally - Credit limits and credit terms can be powerful sales
tools. Business Credit Insurance can also remove the need for customers
to provide a letter of credit.
A good business credit insurance broker will help businesses meet
these goals.
The business credit insurance premium is based on several factors and
can vary widely from one company to another because no two risks will be
the same. Typically, the cost of a business credit insurance policy is
a small fraction of 1 percent of covered sales. When an insured
sustains a covered loss, the insurance company reimburses the loss up to
100 percent above a pre-established deductible and/or coinsurance. The
deductible typically reflects the expected loss ratio of a company or
industry. The coinsurance encourages a partnership between the insured
and the insurer.
Accounts receivable can be a company's most valuable, yet most
vulnerable asset and it should be protected. Just as inventory and
equipment are routinely insured, it makes good business sense to have
coverage for this valuable asset.
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