Accounts Receivable Insurance: Protect Your Business from Bad Debt

As a business owner, one of the most significant concerns you can face is the possibility of bad debt. In a perfect world, your customers would pay on time, every time. Unfortunately, this isn’t always the case. When customers fail to pay their debts, it can put your business in financial jeopardy.

This is where accounts receivable insurance comes into play. This type of insurance is designed to protect your business from bad debt by ensuring that you receive payment even if your customers don’t pay.

What is Accounts Receivable Insurance?

Accounts receivable insurance is coverage that protects businesses from financial loss resulting from non-payment of commercial debts. It works by providing insurance coverage for the outstanding receivables of a business in the event that a customer defaults on a payment.

The policy typically requires businesses to submit a list of outstanding balances, and the insurer will then offer coverage based on the perceived risk associated with each debt. This means that the insurance provider will only offer coverage for debts that they deem to be low risk, and will charge higher premiums for higher-risk debts.

Accounts receivable insurance is typically offered as either a standalone policy or as part of a broader trade credit insurance policy.

What are the Benefits of Accounts Receivable Insurance?

There are several benefits to having accounts receivable insurance:

• Provides protection against non-payment of debts
• Helps to mitigate the risks associated with extending credit to customers
• Can help to improve cash flow and reduce bad debt reserves
• Enables businesses to offer more flexible payment terms to customers

How Does Accounts Receivable Insurance Work?

Accounts receivable insurance works by providing coverage for the outstanding balances of a business in the event that a customer defaults on a payment.

Let’s say that your business has outstanding receivables of $100,000. You purchase accounts receivable insurance with a coverage limit of $50,000. If one of your customers defaults on a payment of $20,000, your accounts receivable insurer will pay out that amount, leaving your business responsible for the remaining $80,000.

It’s important to note that accounts receivable insurance typically only covers debts that are less than 90 days past due. This is because older debts are considered higher risk and are more difficult to collect on.

Who Needs Accounts Receivable Insurance?

Accounts receivable insurance is beneficial for any business that extends credit to customers. This includes businesses that:

• Sell goods or services on credit
• Offer financing options to customers
• Provide services on a retainer or subscription basis
• Have long payment terms or high-value invoices

If your business relies on a small number of high-value customers for a significant portion of your revenue, accounts receivable insurance can be particularly beneficial. This is because the loss of a single customer can have a significant impact on your bottom line.

What Does Accounts Receivable Insurance Cover?

Accounts receivable insurance typically covers the following:

• Non-payment of debts by customers due to bankruptcy or insolvency
• Non-payment of debts due to customer disputes, fraud, or other causes
• Recovery costs associated with collecting on debts

It’s important to note that accounts receivable insurance does not cover debts that are the result of poor quality goods or services, or debts that are the result of a breach of contract by the insured business.

How Much Does Accounts Receivable Insurance Cost?

The cost of accounts receivable insurance varies depending on a variety of factors, including:

• The creditworthiness of your customers
• The size and value of your outstanding receivables
• The industry in which your business operates
• The level of coverage you require

Generally speaking, businesses can expect to pay between 0.5% and 1.5% of their outstanding receivables for accounts receivable insurance coverage.

FAQ

What is the difference between accounts receivable insurance and trade credit insurance?

Accounts receivable insurance is a type of trade credit insurance that specifically covers outstanding debt balances. Trade credit insurance, on the other hand, provides broader coverage for a business’s credit risks, including insolvency, bankruptcy, and other risks associated with extending credit to customers.

Is accounts receivable insurance tax-deductible?

Yes, accounts receivable insurance is typically tax-deductible as a business expense.

Can accounts receivable insurance help improve my credit rating?

No, accounts receivable insurance does not directly impact your credit rating. However, by protecting your business from bad debt, it can help to improve your cash flow and financial stability, which can indirectly impact your credit rating.

Conclusion

Accounts receivable insurance is an important tool for businesses that rely on extending credit to customers. By protecting your business from bad debt, it can help to improve your financial stability and provide peace of mind.

If you’re interested in learning more about accounts receivable insurance, be sure to speak with a knowledgeable insurance agent who can help you determine whether this type of coverage is right for your business.