Demand for credit has evolved and won’t return to pre-2020 norms.
- Facing limited access to working capital, your customers need larger credit lines.
- COVID payment terms won’t go back. In some sectors 90 days is the new net 30.
- Your customers are getting paid slower by their customers, impacting cash flow.
- Distributors are insisting on more credit to keep suppliers’ products in inventory.
- Supply chains are strained. Shipment delays are stretching manufacturing cycles.
- Vendors are offering more credit to beat the competition or just to win orders.
Credit risks will increase in this recovery if your customers:
- Are paying slow not because of COVID
- Cannot maintain sufficient cash flow
- Take on too much balance sheet debt
- Lack flexibility to handle rising inflation
- Spend with irrational exuberance
- Over-anticipate customer demand
- Underestimate their own competition
- Grow into receivables concentrations
Business is improving but what is the new normal?
- Does your company have enough working capital to carry growing A/R balances?
- Is your bank—or another lender—prepared to finance your accounts receivable?
- What will the recovery curve look like? Slow and steady? Precipitous expansion?
- Are societal and geopolitical tensions easing? Or might they continue to escalate?
- Was COVID-19 a one-and-done scenario? Will there be more “black swan” events?
Your accounts receivable can be insured against nonpayment risks with a trade credit insurance policy. If you have credit insurance and one of your customers defaults, then—as with coverage you have on your company’s other assets—you can file a claim and get indemnified.
A credit insurance policy can cover all of your sales, a reasonable spread of risk, or an individual customer or transaction. Insurable credit limits may be set by an underwriter or a policy can rely upon your company’s own credit management procedures and experience with your customers.
In any case, the cost is low. Typically a fraction of a percent of your covered sales volume. Whether or not you pass this incremental expense to your customers, the price of credit insurance is insignificant compared to the additional business you can win with competitive payment terms.
Credit insurance is a sales and financing tool. Beyond managing nonpayment risks, the coverage helps you offer competitive credit terms to win more orders and—if you need to finance your invoices—makes your receivables more attractive to banks and other lenders.
As with other kinds of insurance policies, the principal reason for obtaining credit insurance is not to profit on the premium by incurring losses and filing claims. It’s to give your company the opportunity to keep doing business even amidst unpredictable economic circumstances.
Demand for credit insurance has grown since the outbreak of the pandemic. At the same time, underwriting capacity has tightened and credit insurance has become a seller’s market. Following some best practices when you apply will net you the most effective policy.
The best way to obtain credit insurance today is by applying for coverage on a reasonable spread of risk rather than cherry-picking. Covering all your receivables provides the most comprehensive protection anyway, since there’s no way to predict which of your customer(s) might default.
In policy quotations, expect to see higher deductibles and requirements to monitor your customers on an ongoing basis. Insurers are seeking to share the risk, not take all of it on themselves. Premiums have increased but rates remain low compared with the benefits of credit insurance.
Insurance companies paid a lot of claims in the wake of the 2008-2009 recession. That kind of surge in claim filings has not been repeated (yet) in COVID-time. Payment morality has declined among debtors, but bad debt losses and claim volumes have remained relatively level.
Many claims that did get filed over the past year were for conventional kinds of reasons rather than being directly attributable to the pandemic economy. Insurance companies paid these claims in due course, without any force majeure issues or other special treatment arising from COVID.
Meridian specializes in credit insurance. We offer 28 years of brokering experience and access to every insurance company in the market. Beyond negotiating the most effective coverage, we provide comprehensive support for every policy we sell, including in the event of claims.
For more information about credit insurance, trade finance, and Meridian’s other services, call us at 310.260.2130, visit www.meridianfinance.com, or email us at email@example.com.