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Credit Insurance Explained
Whenever a company sells goods or services to another business or individual and extends credit terms, a payment risk is generated. Even with the most sound credit control practices, a company cannot completely avoid the risk of having a buyer default on paying an invoice.
Having a customer default on their invoice can have dramatic implications on your business most of which is cash flow. Not only have you lost the stock but you will need to work double time generating new sales to make up for the lost sales that have already passed through your fingers.
But there is a way that you can mitigate this risk - by purchasing credit insurance.
Insurance companies across Australia have a range of credit insurance policies that are designed specifically to insure businesses against bad debts. Policies provide cover across a range of business activities including the whole debtors' ledger and can include specific items such cancellation of licenses, loss of contracts, defaults by government and major organizations and currency discrepancy.
Policies can be structured with varying levels of excesses and indemnities to cater for all business sizes and structures.
There are a number of benefits to purchasing credit insurance including:
• Possible enhancement of the organization's borrowing position with financial institutions who recognized the value of worth of a credit risk insurance policy asset,
• The policy can provide a structure within which a company can develop effective credit assessment, evaluation and control procedures,
• A freeing up of capital for business development and other purposes, and
• Risk management spread because credit risks or exposures are shared with an insurer.
