There’s an old adage that 80 percent of a company’s revenue comes from 20 percent of its customers. Though the exact percentages will vary from company to company, the 80/20 rule gets at a fundamental truth of the business world: your firm’s financial health is inexorably linked to the financial health of your biggest clients.
When large companies go bankrupt, they often take their vendors and suppliers down with them. What would happen to your balance sheet if your largest client suddenly filed for bankruptcy? Aside from the loss of future revenue, you might find yourself facing a sizable accounts receivable default. Do you have sufficient bad-debt reserves to absorb such a loss?
Accounts receivable insurance can help protect your company from a catastrophic accounts receivable loss. Each policy is tailored to the insured’s individual needs, so you can decide whether you wish to insure all your accounts or only a select few. The underwriter will conduct credit evaluations on the accounts you wish to insure and approve them for specific credit limits based on your requests and the results of their research.
Although protecting your firm from a catastrophic accounts receivable loss is the primary function of accounts receivable insurance, there are a number of ancillary benefits of this type of coverage:
- Expand your sales with less risk - When your receivables are insured, your firm can expand its sales without constantly worrying about accounts receivable exposures. Whether it is expanding into new markets or just selling more to your existing clients, don’t let the fear of an accounts receivable default limit your growth.
- Reduce your bad-debt reserves - Insuring your receivables allows you to reduce your bad-debt reserves, which frees up assets that you can use to grow your business or pay off debt.
- Maximize your available working capital - Lenders will often advance more capital against insured receivables because they know the default risk is reduced,
- Leverage credit risk expertise - An industry-specific financial analyst will actively research and monitor the accounts you wish to insure. You'll receive regular reports about your accounts, so if one of your clients encounters financial difficulty, you'll learn about it quickly.
If your firm derives a significant percentage of its revenue from a few large accounts, you may want to consider including accounts receivable insurance as a component of your comprehensive risk management strategy.