How to Protect Your Business from Bad Debts (While Increasing Sales!)

It is one thing to protect your own business in a pandemic world (read more about Business Interruption Insurance here), but there’s no protecting yourself against bad debts… Or is there?

So What Is Bad Debt?

Bad debt occurs when you are unable to collect a payment for services rendered or products delivered. 

This can occur at any stage of the supply chain. A scenario: You agree to transport cargo for your customer, an agreement was signed, and you provide a credit term i.e. trade credit. For some reason, after delivery, your customer is unable to pay your invoice. As a result, your fuel is uncompensated, cashflow is now strapped, and hence you are unable to commit to another deal, or worse, end up owing your own suppliers.

Bad debt expense(if any) is an unfortunate cost, as there is always a default risk inherent to extending credit – yet most businesses now require credit term as a bargaining chip to you closing their deal.

In some cases, your customer simply need a slight extension of payment term. However, what if your customer declares insolvency? How do you safeguard your business from working with high-risk clients? How can you proceed with pursuing new businesses and maintaining relationships with a peace of mind?

How Can (Trade) Credit Insurance Help?

Credit insurance, also known as accounts receivable insurance, is the answer – this policy provides a guarantee that your Insurer will pay off an outstanding debt, when your customer is unable to.

This isn’t just necessary for new businesses, but also long-term partners who might at anytime, be at political risk due to trade wars between countries.

Here are some of the risks you can be insured for with Credit Insurance:

• Client insolvency
• Disputed debts
• Political risk
• Natural disaster
• Pre-shipment risk
• Debt collection service fees
• Risk assessment and ongoing monitoring of customer

So How Will It Help Grow Your Sales?

Are you hoping to land that new big fish, but worried about the credit terms paralysing your business? Or perhaps you are hoping to expand your credit limits with existing customers?

Insurers will conduct an credit-worthiness assessment on the customer you are insuring against, and apply a risk rating on the likelihood of them defaulting on payment. From there, your Insurer will calculate enough coverage to recoup any potential losses.

I.e. each credit insurance policy is tailored to a specific customer, and it can be applicable for single-transaction projects, or transactions over the course of 1 year – to which you can simply integrate the premium fees into the deal.

By having credit insurance to provide a risk rating and a safeguard on your working capital, you can do your own due diligence in assessing a prospect business partner.

More importantly, a good track record will build trust with your bank, and improve your lending facilities for future business expansions.

In a nutshell, Credit Insurance can help you increase your B2B sales revenue by:

• Moving bad debt reserves into cash flow to invest in sales growth
• Securing better borrowing terms from your bank
• Expanding in domestic or overseas markets with less risk
• Increasing credit limits to existing customers
• Obtaining more working capital by using insured accounts receivable as collateral

So yes, you’d read it correctly – credit insurance can definitely help with your company’s sales and profits, all without additional risk.

At AWG Insurance, we are committed to a long-term relationship as your trusted Insurance broker, and would like to help you assess your insurance needs, and protect your businesses against bad debts.

We will be delighted to assist in your enquiries, so do drop us a message below, or call us at AWG (6294 6688) for assistance!