Insurance: Trade Credit Insurance How it Beneficial
Generally, when viewing the balance sheet of any organization, it will be possible to find that the accounts receivable represents to nearly 40% of their assets. But, in the present challenging business environment, non payment of any of these accounts receivable can turn out to be a great financial and operational threat for any organization. For instance, if one of the customers, does not pay an amount of $1,00,000 invoice from a company that has a 5% profit margin, the organization will have to generate $2 million in addition to balancing the default payment by the customer. The reason for default payment can be anything from the point of view of the customer and the risk profile will further bring down the ability to pay the money, if the financial situation worsens.
The present competitive business arena can squeeze the margins of the organization and so it is highly important that the business organization should take effective care of the accounts receivables. But, this item in the asset portion of the balance sheet of any organization can be surprisingly volatile. Something that looked like a stable business environment at one situation can turn out to be a disarray on the next day. However, there is a proven solution for protecting the potential accounts receivable for a business. Even this solution can help them in expanding sales and it is nothing but trade credit insurance.
Regardless of whether a company is trading with established customers or whether they are seeking for new markets, they can make use of trade credit insurance for protecting their cash flow and balance sheet against a sudden shock of non-payments.
What is this insurance?
This credit insurance is a tool that can be used by companies for bringing down or eliminating the risk associated with non-payment of commercial debt. If the client of a policyholder of this insurance, does not pay the obligated money, the insurance company will make good on the obligation. This will permit the organization to bring down the risk it might incur, when they are talking with a new or unknown client. It will also help when some unforeseen economic, business and other factors prevent the client from making the payment.
This credit insurance also enables organizations to cultivate clients in different geographical locations and they can also get the chance to expand their business with existing customers and even they can extend more credit to their customers. All these things can be done without increasing the risk of non payment.
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