Updated: Aug 12
The key to selling trade credit insurance in this challenging economic environment is to show commercial clients their potential return on investment.
Trade credit insurance is an overlooked but essential coverage. It is perhaps more important now than it ever has been, as some businesses stand on shaky ground due to the COVID-19 pandemic and recession.
Also known as credit insurance or receivables insurance, the coverage is designed for clients to breathe easier about their receivables. Prudent business owners buy this insurance to protect against the risk that their customers don’t pay within the time frame or on the terms to which they agreed. If a customer fails to pay, the client files a claim with the insurance company, and they get paid. It works like any other type of insurance coverage they have.
This type of insurance has options about who and what can be insured; they range from a whole portfolio to just a specific customer insured for a certain percentage against a specific risk. It can be triggered due to a variety of factors including bankruptcy, political risk or simply non-payment. In these times, insolvency is a great concern.
When a company’s client goes bankrupt, there’s a chance the company could fail as well. David Dienesch, board chairman of the Receivables Insurance Association of Canada, noted that “one in four companies goes bankrupt because one of their customers went bankrupt.” He was speaking about credit insurance last month during Canadian Underwriter’s webinar, COVID-19 and the Economy: Protecting Your Receivables.
For commercial brokers, that stat alone could be enough of an incentive for your clients to get protected. But if they need more convincing, they should be made aware of the downside of extended payment terms being offered.
In an effort to win customers in today’s competitive environment, businesses are offering more generous credit terms. Client payment options range from the standard 30 days to up to 90 days to pay an invoice. This means businesses could have up to three months’ worth of sales revenue tied up in accounts receivables. That makes it one of the most vulnerable assets. Unforeseen losses can spiral out of control.
Business owners see the need to protect tangible assets like their buildings and machinery, but they often forget just how much their business relies on the accounts receivables to make payroll and keep the lights on.
This is an opportunity for a broker to really set themselves apart and truly become a trusted advisor.
A hurdle brokers face when discussing this coverage is the cost. Money is tight these days. Furthermore, this coverage is relative to a business’ receivable; it can be costly depending on to whom you’re talking. This, coupled with the fact that there are not very many insurance companies willing to take on this type of risk, makes for a less than easy sale closing.
This leads to the next question: How do you get customers to spend money when their revenues are not what they used to be?
First, you need to understand what business owners value most — return on investment. Credit insurance is not just another form of insurance. It provides much more. When a policy is purchased the consumer is not just getting a guarantee on their receivables they are also getting a number of additional services such as:
Consumer reviews to ensure clients of policyholders are not on the brink of insolvency. In the event they are, the review will provide guidance on next steps. This also means that a policyholder can redirect the time spent on reviewing new buyers into their sales cycle.
Claims are paid at 90%, which means banks will margin receivables at 90%. This provides policyholders with an opportunity to increase their bank line if/when required for acquisitions, real estate or other needs.
Policy premium is tax deductible.
A ‘no claims bonus’ is also available to policyholders. A total of 15% of the policy premium (over and above any minimum premium) will be paid back to the policyholder in the event there are no claims reported.
The return on investment is clear — brokers just need to know how to lay the facts out.
An effective approach by brokers can start by asking the client to review their most recent financial statements just to see how much they have tied up in accounts receivables. Clients who are in the business-to-business space like manufacturing, import/export, wholesale distribution, or professional services will be especially receptive to this exercise: for them, accounts receivables is typically a major asset and concern.
Pointing to the benefits of having credit insurance — such as offering generous credit terms to help win them more deals and business, and broader credit terms — can also help encourage larger orders and Increased customer loyalty.
With the economic downturn, cash flows are tight. But that doesn’t mean there aren’t opportunities to grow. Carrying trade credit insurance can allow clients to aggressively grow their sales without the worry of non-payment risk. And you, the broker, are able to cement your position as the trusted advisor and grow your own business.