Back to Basics: Features of Credit Insurance Policies That Fit Your Companies' Needs

By Stern, Nicholas | Business Credit, February 2018 | Go to article overview

Back to Basics: Features of Credit Insurance Policies That Fit Your Companies' Needs


Stern, Nicholas, Business Credit


For credit managers at companies looking to mitigate their payment risks, credit insurance policies are a staple in the trade credit industry. Accounts receivable (AR) can represent up to 37% of a company's current assets, and considering that other assets like inventory, plants and equipment are insured by third parties, it makes sense for companies to want to insure their AR portfolios, said John Moli, senior vice president at insurance broker Marsh LLC in New York, NY in a recent FCIB webinar, Trade Credit Insurance 101 (nacm.org/webinars).

But where should trade creditors turn to find the best plan? As with so many things in life, the answer depends a lot on individual circumstances, said Jay Tenney, managing director at credit insurance broker Trade Risk Group in Irving, TX.

Why Choose Credit Insurance

Tenney sees three basic reasons why companies choose to get involved with credit insurance. The first is to protect against an unexpected loss, most likely a catastrophic-type event or a situation where they're worried about a flailing industry sector in which a steady stream of losses and payment defaults can begin to gather momentum. On the export side, companies can seek credit insurance to mitigate fears about a country going under or facing adverse economic circumstances, like in Qatar, Egypt or Argentina, he said.

Corporations tend to choose credit insurance policies to receive better treatment from their lenders, Tenney said. Banks looking for collateral enhancement can provide companies that obtain such policies with more availability on a bank line of credit, offer better loan covenants or even a better borrowing rate in some situations. In his experience, Tenney said better rates are actually secondary considerations to just having more access to capital.

But he's convinced that the third and perhaps most important reason companies buy such policies--and typically hold onto them for an average of 13 years--is as a tool to grow sales.

From a domestic standpoint, distributers or wholesalers, for instance, might use credit insurance as a competitive marketing advantage by having a policy that can allow them to be more aggressive with seeking new sales to customers or by pushing up credit limits, said Christopher Criblez, vice president, Sales-West Coast for Atradius.

For companies selling into foreign countries, having credit insurance can allow enterprises in competitive sectors to sell on more open terms than they would otherwise, Tenney said.

One argument against obtaining credit insurance Tenney hears a lot is in situations where a distributor with tight margins is having a difficult time justifying the cost of the plan. "I'll say it's because you have tight margins that it's affordable," he said. "Any credit loss you take is going to be a lot more painful than for company that has large margins," such as software companies.

In circumstances where a company has one customer that accounts for, say, 70% of revenue, Criblez said it would be very risky not to have some sort of credit insurance.

Overall, you can look at two companies in the same sector with similar sales volumes that may choose radically different credit insurance policies. How they choose for the most part comes down to their specific risk tolerance and their trade credit management capacity and expertise, Tenney said.

Choosing the Best Fit

Commercial creditors with a sole customer that's causing risk concern might consider a type of credit insurance plan to fit a circumstance that's known as a single-bidder policy, Criblez said. Since the Great Recession, most credit insurers will only offer these types of plans if the trade creditor's customer is an investment-grade company or higher, or is a private company with similar credit quality, Tenney said. The relative cost of these plans tends to be the highest for any type of credit insurance, though credit managers can try to lower the premiums on such plans by instead insuring a basket of receivables. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Back to Basics: Features of Credit Insurance Policies That Fit Your Companies' Needs
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.