Further benefits of trade credit insurance – especially when a company is expanding its geographic market

By Ron Doyle

The purchase of credit insurance and the better management of the accounts receivable provide very positive benefits, even if a claim for a bad debt never occurs. In my last blog post, I detailed five benefits. In this “sequel” to my last post, I continue to list and explain the benefits of trade credit and political risk insurance.

Benefit #6: With further Globalization, many companies are looking to new markets, and this means taking on new buyers. If you can look at new markets and different methods to structure your approach to these markets and at the same time reduce the risk, there can be very good potential for new sales. Credit insurance can provide the comfort you may need to take the initiative without threatening your established business.

Because credit insurance premiums are normally below 50 basis points and the gross margins on incremental sales are normally in the 5% to 20% range, a small increase in incremental sales will quickly cover the total premium for a whole program.

Consider the following example in Canadian dollars:

• Existing sales $20 million
• Gross margin 10%
• Estimated premium rate 40 basis points
• Incremental sales of $2 million because of a safe expansion of the markets

The total cost of the premium for the above would be $88,000 and the gross margin on the incremental sales would be $200,000.

Benefit #7: Protection from competition is also an important benefit of credit insurance.  You may have expanded your sales to foreign markets in a prudent manner by requiring Letters of Credit, but now a competitor has approached the buyer and is offering open account terms. Credit insurance can allow you to react to this challenge or be proactive in order to avoid the threat. I have seen such a situation: The insured offered open account terms and saved a $2 million account.

Benefit #8: Improved cash flow can be one result from better margining – including margining of overseas receivables – or factoring the insured receivables by a bank or international factor.

Benefit #9: Even negative information may result in large savings. If a credit insurer declines to cover a buyer or country, this is valuable information for you and your company. If the decision has been taken because of a negative assessment of a potential buyer’s creditworthiness, you need to know this information to make your own credit decision. With the information provided by your credit insurer, you may avoid being caught when other suppliers have cut-off a buyer because of slow payment. The insurer may already be processing claims against this potential buyer.

In conclusion, when the premium cost of credit or political risk insurance is evaluated against the very real benefits of a trade credit insurance program, it is amazing that any CFO or CEO needs to go to bed worrying about big exposures on the Balance Sheet! This type of worry just is not necessary.

Credit insurance may reduce your costs, improve your cash flow and increase your sales – yet you haven’t even had a claim paid. Good management is good management of the assets at hand, thus creating the best return for shareholders. Bad management is simply bad management, often due to poor information and a short-term strategy that ignores the facts.

(Ron Doyle is a founder of Millennium CreditRisk Management – credit and political risk insurance specialists – www.mcm.ca. ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)