As a small business owner, you have a lot to worry about. From keeping up with the day-to-day demands to pleasing customers to balancing the books, business owners have a lot on their plates. One challenging area of running a business that many small business owners overlook is the risk of bad debt. In fact, the average small business owner carries over $195,000 in debt, so dealing with bad customer debt can cause some serious damage to a business’ financial health.
Good financial health is essential for the success and the livelihood of small businesses. The financial health of small businesses is also an indication of the economy’s performance. There is a lot of ways to maintain the financial health of your business, which can include properly managing customer payment obligations and mitigating the risk of bad debt by acquiring trade credit insurance.
What is Trade Credit Insurance?
The purpose of trade credit insurance is to protect businesses from financial loss due to credit risks, default accounts, insolvency or bankruptcy from customers. Trade credit insurance is designed to specifically mitigate risks to accounts receivables.
Before you think that trade credit insurance is a luxury you can’t afford, especially if you are already struggling with cash flow, many small and medium-sized businesses purchase trade credit insurance for this very reason: to help them mitigate the financial risks associated with bad consumer debt.
5 Signs That Say You Need To Purchase Trade Credit Insurance for Your Business
1. A Lot of High Customer Credit Risks
Customer bankruptcy is a common occurrence, which can make collecting on invoices incredibly difficult. If businesses aren’t able to collect accounts receivables in a reasonable amount of time, they are going to see a negative effect on their cash flow, which hinders the overall financial health of the business.
If this is something that your business is struggling to manage, then it may be a good idea to revisit your credit terms. You may be extending credit to customers who aren’t credit-worthy or who have a high credit risk, which is another good reason you need trade credit insurance.
2. Sales Opportunities Need Quick Turnarounds
When a business is presented with a sales opportunity, it’s important for businesses to act on this opportunity quickly. Companies also need to assess the financial stability of their potential customers and the legitimacy of their purchasing power before extending any amount of credit. Of course, the likelihood of a customer making a purchase is much greater when they have credit available, however, this doesn’t always mean that the customer will pay his or her bills.
By having trade credit insurance, businesses can feel better about extending credit as needed to the customer, ensuring the sale and ensuring the business will not suffer a loss.
3. You Need To Compete With Your Credit
Trade credit insurance allows businesses to compete with their competitors’ credit limits and payment terms. Let’s look at a quick example: If one competitor offers customers payment terms of $100,000 line of credit with 60-day terms, and your business can only afford to offer $50,000 with 15-day terms, which company do you think will win the business?
Businesses that purchase trade credit insurance are able to extend riskier credit terms to customers knowing that they have a layer of financial protection beneath them in the event of bankruptcy, insolvency, and default.
4. You Want Your Business to Grow
A business that chooses to purchase trade credit insurance is one that is able to build and grow. However, this can be difficult when businesses struggle with cash flow or are struggling to collect payments.
Trade credit insurance can bridge the gap between sales and finance departments, while also reducing collection calls.
5. Your Business Needs Stable Financial Health
The average accounts receivables for a small business represents up to 40 percent of the company’s cash flow. If your business isn’t collecting accounts receivables, imagine how this looks to investors or banks when they review your company’s financial health and stability.
Trade credit insurance provides businesses with a blanket of protection in the event of default. As we already discussed, these events can negatively impact cash flow, which can make it difficult for the business to grow further or ever reach a level of financial stability.
Finally, trade credit insurance is great for small businesses, helping them better manage and offer credit and payment terms for customers, maximize sales opportunities, bridge the gap between sales and finance departments, improve the overall financial health of the business and give the owner peace of mind.
With trade credit insurance, businesses can stop worrying or spending time on accounts receivables or making collections calls and focus more on the day-to-day issues that matter most.