Many business owners commonly view the insurance required for their operations as a necessary, but unwelcome expense. Accounts receivable insurance, however, can be an important tool for helping your business succeed and grow when you begin exporting.
Take commodity traders. These businesses that provide Canada’s abundant raw materials to the world usually operate on very low gross profit margins. It can take a long time to recover from the hit to their income statement delivered by a payment default from an international customer. Accounts receivable insurance is critical to the profitability of commodity businesses because of the balance sheet protection it provides.
Beyond that defensive protection, however, more and more Canadian business owners have come to understand the value of accounts receivable insurance as an investment—rather than an expense— in their export plan. Over the last year, as uncertainty about the Canada-U.S. trade relationship swirled, Global Credit Risk Management Inc., saw a 20% increase in our business providing accounts receivable insurance for Canadian companies looking to diversify their export plans into new markets.
When leveraged properly, your accounts receivable insurance can virtually pay for itself through increased sales, tighter capital management and improved profit margins. Here are three reasons why exporters should think about accounts receivable insurance as a tool for not just protecting your export revenue, but growing it.
Having accounts receivable insurance in place provides you with a layer of security through insurance company support for the credit decisions you make with new customers in new and existing markets. This will benefit your sales team by allowing them to focus more on creating new sales opportunities with creditworthy customers.
By embedding the insurance policy management into your company’s credit processes with new customers, you can bring additional discipline to your credit practices. For example, your company can reduce the day’s sales outstanding metric that your credit team is measured against. This has the benefit of reducing the amount of financing required from the bank and thus, your overall financing costs.
This is still the No. 1 reason most customers obtain accounts receivable insurance. Insuring your receivables—your company’s biggest asset—will enable your bank to lend you more money on the same asset base.
Here’s an example. On outstanding receivables of $1 million, a bank is typically willing to provide $750,000 of financing based on a value of 75% of the asset—the receivables. However, if the same set of receivables is insured with accounts receivable insurance, the bank may take their margin up to 90% of the insured receivables. In this scenario, the company obtains $150,000 increase in its working capital without having to put up any additional security.
Accounts receivable insurance puts in place important corporate governance around your company’s biggest asset. Beyond the peace of mind this brings to owners and shareholders, it can be an important tool to help your business seize new opportunities and conquer the world.
