Since the economic crisis, more and more businesses are using credit insurance to protect their accounts receivable. Meanwhile, their asset based lenders think it’s a great idea because it dramatically reduces their own risk while increasing their lending volume.
But we’re getting ahead of ourselves. Many finance professionals have not even heard of credit insurance.
Put most simply, credit insurance is a way for companies to protect their accounts receivables (A/R). For most companies, A/R—the money customers owe them for goods or services—is among their largest assets. A single default by a major customer could lead to a bankruptcy of their own. But with credit insurance, if a customer defaults, cannot pay or refuses to pay, the seller still receives payment.
Currently, less than one in 10 U.S. companies uses credit insurance, a far cry from the penetration rates of up to 50% in Europe. However, estimates are that usage in the U.S. will double in the next several years.
For starters, 160,000 U.S. companies have gone out of business since 2007. Many of those companies dragged perfectly healthy suppliers down with them. That lesson has not been lost on the survivors.
Even small to mid-size companies are becoming much more serious about risk management. The fact is that default by customers is more common than fire, theft or flood. And now, with so many companies out of business, the universe of customers is smaller and the risk has become even greater.