Credit insurance

A seller may find that it can shift some of the risk associated with its accounts receivable to a firm that provides credit insurance. To do so, contact a credit insurer, to see if it will provide coverage for the company’s accounts receivable. Under a credit insurance policy, the insurer protects the seller against customer nonpayment.

The insurer should be willing to provide coverage against customer nonpayment if a proposed customer clears its internal review process. Credit insurance offers the following benefits:

  • Increased credit. A company may be able to increase the credit levels offered to its customers, thereby potentially increasing revenue.
  • Faster international deals. An international sale might normally be delayed while the parties arrange a letter of credit, but can be completed faster with credit insurance.
  • Custom product coverage. The insurance can cover the shipment of custom-made products, in case customers cancel their orders prior to delivery.
  • Reduced credit staff. Credit insurance essentially shifts risk away from a business, so it is especially beneficial in companies that have an understaffed credit department that cannot adequately keep track of customer credit levels.

As is the case with all insurance policies, be sure to examine the terms of a credit insurance agreement for exclusions, to see what the insurer will not cover.

Tip: It may be possible to offload the cost of credit insurance to customers by adding it to customer invoices. This is most likely to be acceptable for international deals, where a customer would otherwise be forced to obtain a letter of credit to pay for a transaction.