As a business owner, you have many risks to assess within your business operations. One of them is the possibility that a customer will default on money – or "receivables" – due to you. In some cases this could be only a minor setback. But if the receivable is substantial, a non-payment could threaten your business. Another threat to your receivables is a building fire that destroys records of work completed.
One solution to these concerns is accounts receivable insurance. This coverage can be especially helpful for businesses that want to pay small amounts incrementally to cover large risks that could threaten the stability of the company. An independent agent in the Trusted Choice® network can help you compare accounts receivable insurance quotes and evaluate this coverage for your needs. Find a local member agent for personal assistance today.
Accounts Receivable Insurance Facts
- Insurance companies that provide accounts receivable insurance differ in how they write this coverage;
- Sometimes it is called credit insurance and covers bad credit risks.
- Sometimes accounts receivable insurance only covers accounts receivables records destroyed in a "covered peril," such as fire.
- Obtaining credit insurance on your key customers will enhance your own credit worthiness.
- A credit insurance company can act as an unpaid credit analyst on your behalf.
Does Accounts Receivable Insurance Cover Flood Damage?
Depending on the insurance company, accounts receivable insurance can be designed to cover two types of risk:
- Loss of income due to non-payment by a client for services rendered.
- Loss of records, due to a covered peril, that are required for you to be able to collect on outstanding receivables for work completed.
In the latter case - when your accounting paperwork has been damaged or destroyed - your accounts receivable coverage may cover the costs to reconstruct those records so that you can proceed with collecting on the debts.
If your insurance policy provides coverage for reconstructing your lost paperwork, it will provide compensation for "covered perils." This means that your business insurance policy must explicitly cover the cause of loss. This may include:
- Flood damage
- Loss due to fire
- Loss due to severe weather, such as a hurricane or tornado
Be sure to fully understand your policy and what it does and does not cover to avoid having your insurance claim denied at the time when you need to coverage to rebuild your business.
How Does Credit Insurance Work?
When you approach a credit insurance company to cover your risk of having an non-collectable receivable, they will want the following information:
- Complete information on your company and your industry
- A history of all your past bad debt write-offs
- A list of all your outstanding receivables
- A list of the customers whose receivables you wish to insure
- Those customers' payment history, outstanding balance and the maximum limit you wish to insure on each
The reason the insurer needs a list of all your receivables is to be sure that you are not "cherry picking" your accounts by trying to insure only the least credit worthy of your customers. Once this information is available, the carrier will examine the credit history of all the accounts you want to insure and choose whether to offer you the coverage.
This is a very specialized and complicated area of insurance. It is important that you work with a knowledgeable agent who can help you compare accounts receivable insurance quotes and coverage from several different insurance companies and find the right coverage for your needs and budget.
Deductibles and Costs of Accounts Receivable Insurance
Most accounts receivable policies will involve two expenses in addition to your premium costs – a deductible and coinsurance. Deductibles and coinsurance are collectively referred to as "risk retention."
Here is how they typically work.
- Deductibles: A deductible will be the amount of loss you must first retain during a given policy year before the insurer will pay anything. This will be based on:
- Your past bad debt history
- The nature and amount of your insured accounts
- Your account's credit history
If you have only a few large accounts, it is possible that the deductible will apply on a per-account basis.
- Coinsurance: The coinsurance percentage is an amount of every loss (over and above the deductible) that you must pay. There are several reasons for the coinsurance feature:
- It assures the insurer that you will retain an interest in monitoring the credit worthiness of each client
- It reduces the insurer's risks
- It reduces your cost
Coinsurance percentages generally range from 10 to 20 percent. If you carry a coinsurance percentage that is less than your profit margin, it allows you to insure your operating costs while minimizing the premium by not insuring your profit.
There is no flat rate in the account receivable insurance market. Every risk is priced separately. As a general rule, premiums will be not more than 1 percent of your average receivables.
Important Credit Insurance Considerations
An accounts receivable insurance policy is designed to remove as much of the ordinary risk of an unexpected bad debt as possible.
It is not a method for reassigning bad accounts to someone else. Nor is it a reason to grant credit to customers you have reason to believe are not fully credit-worthy.
The following are some important considerations:
- Insurance companies must underwrite and approve every new customer added to a policy.
- Remember that you will share in every loss because of the deductible and coinsurance features of the policy, so choose the clients you will work with on credit wisely.
- The insurer's underwriting work (addition of each client to the coverage under your policy) can work as an additional tool for your business. If a carrier refuses to accept a new customer, it is a warning to you not to do business with that customer, or to limit your granting of credit. Think of your accounts receivable insurer as your credit department.
Be sure you get the best coverage for your needs at the lowest cost by doing business with an experienced agent in the Trusted Choice network.
Credit Insurance Benefits
You will experience a number of benefits by establishing an accounts receivable insurance program. This coverage:
- Enables you to grant more credit to more customers than you might otherwise
- Eliminates the chance of a large, unexpected default negatively impacting your business
- Provides a cost-effective method of doing an expert credit check on each customer
- Enhances your own credit worthiness and borrowing power; specifically, if you borrow against your receivables to generate more working capital, you will leverage the amount you can access
Accounts receivable insurance is a great tool for a small to mid-sized business. In most cases it will pay for itself after accounting for all the benefits.
Evaluating Accounts Receivable Insurance Offers
There is no such thing as a standard accounts receivable insurance policy. Every insurance company has its own wording and provisions. Key elements in any policy are:
- How the policy defines a loss
- How and when to file a claim
- A definition of insolvency or bankruptcy
- Chapter 7 vs. Chapter 13 bankruptcy
- Losses denominated in a foreign currency (if you have that coverage)
- How the policy handles partial billings on work in progress
- How you and your insurance company share collection expenses
- How the policy allocates receivable recoveries
Before committing to a carrier and a specific accounts receivable insurance policy, you should ask for a sample policy and review it with your agent and your attorney. When you experience a loss is not the time to discover that your policy has a provision that works against you.
A Trusted Choice member agent can help you evaluate multiple accounts receivable insurance quotes and acquire the policy that is best for you.
How to Find the Best Accounts Receivable Insurance
For many businesses, the acquisition of accounts receivable insurance can provide much needed protection against an unexpected credit loss and enhance the company's borrowing power and credit worthiness. For others, the key ingredient is protection against the costs of reconstructing account records after a loss from fire or other covered event.
To find out whether this type of coverage is suitable for the needs of your enterprise, contact a member agent of the Trusted Choice network today.