Business Credit Insurance: Turn your bad debts into not-so-bad debts

Last Updated:
March 22, 2019
Ole Jensen
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The risk of your customers' inability to pay for your services is an inherent part of owning any business. This non-payment can result in a devastating loss of cash flow for your company.

If a customer fails to pay a debt of $100,000 and your profit margin is 5%, then you will need to produce $2,000,000 in sales to make up for the loss. Your business can prepare for such a loss by purchasing a business credit insurance policy.

Not receiving customer payments on time, or at all, could be fatal for your business, but business credit insurance helps transfer that risk.

Policies typically cover about 90% of customers' outstanding debt, so the failure to pay by one large party or multiple small ones will not overwhelm your organization.

There are two main types of Business Credit Insurance:

WHOLE TURNOVER covers the insured's entire book of debtors, providing the maximum level of protection against bad debt.

TOP ACCOUNTS OR SINGLE-BUYER POLICIES underwrite the risk of select accounts that the insured feels are at risk. These policies may be subject to an increased premium, and are riskier than insuring a company's entire accounts receivable asset, since the insured may choose incorrectly and fail to insure an account that defaults.

Insurers assess your business and determine your premium by considering your business' risk, the amount of turnover you want to insure, your customer demographic, the overall state of your industry, and your success or failure in past credit management.

Your premium will likely increase if your customers are concentrated in one or two accounts rather than several. If you prefer to purchase insurance against a specific account or set of accounts, the insurer will investigate the credit worthiness of each individual account when calculating your premium.

Make sure to implement and maintain a stringent credit control policy. Any flexibility or instability ins how your business administers and sustains credit will translate to higher premiums.

Depending on which coverage you choose, you can arrange a policy for a fixed period of 12 months or for the duration of a specific customer's contract.

Customization is Best

A clunky, ill-fitting business credit policy will not benefit your business - make sure to secure tailored coverage that fits your business' needs.

Business credit insurance is a small, specialized field that requires careful risk assessment.

A precise assessment will create an effective insurance policy that keeps you above water if your customers or contractors go under.

Subcontractors face unique risks when it comes to managing finances because they are usually dependent upon payment from general contractors.

Contact me for more information on the unique Protection for subcontractors for Business Credit Insurance.