Overview
Most businesses bill their customers by invoicing them for the goods and services they have provided and they generally agree on an established timeframe in which the account must be settled in full, typically 30, 60 or 90 days. These financial entries may still be recorded manually by means of paper accounting records, by some clients. Such clients are exposed to the risk of not being able to establish who owes them monies if, say, the books of account are burnt. Similarly, clients who store their outstanding debit balances electronically are still exposed to a financial loss, if they don’t back up their records off site etc.
A financial loss will arise if these debit balances are untraceable. Chadwicks can arrange cover for this risk, following specific insured events, please contact us should you be interested.
Bear in mind, however, that the insurance company will only pay (following an insured event) for the cost of recovering lost information and not the financial value of lost debtors or bad debts. The credit risk must be insured under a Credit Insurance policy.
Non-payment risk demands an effective risk management tool
As there are always a few defaulters who fail to pay their debt either on time or at all, it is imperative that the company’s business insurance adequately covers this anomaly. In other words, because the business owner has to assume a non-payment risk, he or she should also assume an effective risk management tool.
Most businesses bill their customers by invoicing them for the goods and services they have provided and they generally agree on an established timeframe in which the account must be settled in full – typically 30, 60 or 90 days.
On the balance sheet, the accounts receivable is classified as a current asset but the astute business owner will also be aware that a percentage of his or her clients will not settle. Part of the risk management strategy will be to factor in an allowance for bad debts, which is then subtracted from the total accounts receivable.
Business owners must beef up protection of accounts receivables
As reputable insurance brokers, we would be inclined to advise business owners to beef up their protectionist strategy by offering them the consummate risk management product – an insurance that effectively protects their balance sheets and assets from traditional losses due to protracted defaults, bankruptcy and insolvency.
Another equally important derivative of business insurance for accounts receivable exists. In the fast moving corporate world, accounts receivable is really like a loan and represents capital invested and frequently borrowed by the vendor or business owner. It can only be viewed as a secure asset, however, once it has been paid by the client.
Can be viewed as significant collateral by banks
If the customer’s debt is insured, this large, risky asset becomes more secure and may be viewed as significant collateral by the banks and other lending institutions. A loan, backed by the insured accounts receivable portfolio, can then be used to defray company expenses and produce more products, in effect growing the business. Quite simply then, accounts receivable protected by corporate insurance can become an effective and uncomplicated trade finance tool.
Bear in mind, however, that the insurance company will only pay (following an insured event) for the cost of recovering lost information and not the financial value of lost debtors or bad debts. The credit risk must be insured under a Credit Insurance policy.
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