Trade Credit Insurance Versus Bad Debt Reserve
Trade Credit Insurance helps free up capital for businesses to use elsewhere. Premiums are tax-deductible, unlike bad-debt reserves where a company sets aside money in case a bad debt is not recoverable.
Calculation of how much to set aside for bad debt reserves can be complicated and even inaccurate when unpredictable events arise and cause major impacts on a company’s cash flow. Is there a sufficient amount set aside?
Self-insuring by using bad debt reserves may come without a direct cost, but it offers limited benefits in the event of a catastrophic loss. Remember, unpaid invoices weaken your cash flow, and those additional costs will add up quickly!
How many opportunities are you missing by self-insuring your business with an allowance for doubtful accounts? With soft costs affecting your bottom line, could you realise increased efficiencies by allowing trade credit insurance to handle the risk while you put that money to work?
Bad Debt Reserve / Self Insurance
Use of a bad debt reserve to offset losses should any customers be unable to pay
Credit Insurance
Insurance product that protects a seller against losses from non-payment of a commercial trade debt
POSITIVES
POSITIVES
Minimal cost to the company in years with no losses
Empowers companies to grow confidently without credit concerns
Simple to administer
Guaranteed protection against non-payment or slow payment
Any loss. You can recover one pound for every pound you reserve
Enhances efficiency of a company’s internal credit department with fast credit limit requests, ongoing buyer monitoring
Maintain a direct relationship with the customer
Credit information, risk assessment, market intelligence, debt collection
Allows exporters to offer safe, open terms overseas
Expands a company’s financing options by increasing its borrowing base with secure receivables
Insolvency, protracted default, and political risks. Maximum liability at ? x premium so your pound goes x times farther
Buyer is unaware of the credit insurance contract; better terms enhance the relationship with the customer
NEGATIVES
NEGATIVES
Company bears burden and cost for internal credit management resources needed to mitigate risk
Most cost-effective for businesses with £3m+ in B2B sales
Depending on risk tolerance, may result in overly conservative limits that reduce potential revenue
Not suited for companies with government or consumer sales
Ties up working capital and impacts capital allocation of the balance sheet
Typically, does not protect from large unexpected catastrophic loss
Utilise unreliable third-party data services
Trade Credit Insurance protects your capital, maintains your cash flow, and—most importantly—secures your earnings against defaults. When compared to self-insurance, TCI provides you with a safer, more strategic accounts receivable management option.
Contact Maggie Brotherson for any Trade Credit enquiries on 07497 199 978 or email, maggie.brotherson@konsileo.com
