Companies that benefit from external market influences like foreign exchange rate fluctuation or changes in public policy can just as easily suffer from them. Unnecessary trading risks can emerge without warning for organizations that have not invested in credit insurance.
Currency volatility and political will are only two of the many factors that can result in companies down the supply chain failing to pay bills on time, leaving upstream organisations with cash flow troubles. An organization’s cash flow will also suffer if a customer’s business fails, if market performance is sluggish, and economic cycles behave unpredictably.
Businesses trading on credit terms mean substantial amounts of working capital are tied up in accounts receivable, which can also lead to cash flow risks if customers don’t pay their invoices on time. As soon as a business sells its goods to a buyer on credit, it puts itself at risk.
However, a credit insurance policy tailored to an organization’s business requirements by a trusted provider can mitigate the risks involved with trading domestically and internationally, regardless of the external factors.
There are many reasons a customer might not be able to pay an invoice on time or at all. Regardless of the reason it is important to safeguard cash flow from bad debt, which can damage profitability and business-supplier relationships. Credit insurance can provide an effective safety net to protect against bad debt. Credit insurers can follow up bad debts on a business’s behalf and cover losses.
Here are four key business risks that can be substantially mitigated by credit insurance.
1. Trading with Unqualified Partners
Buyer ratings, which rank buyer portfolios against specific default criteria determined by country and industry sector, can help businesses identify and steer clear of suspect customer prospects. Unqualified business partners can pose a threat for unwary organizations.
Without visibility into a customer’s financial stability, organizations can unknowingly trade with high-risk partners. Credit insurance companies not only provide ongoing advice on the financial risks of trading partners, letting organizations make better-informed trading decisions, they can also implement a credit insurance policy that can help cover the losses for an organization that has been unwittingly hit by a high-risk partner.
2. Environmental and Political Threats
Customers can fail to pay invoices due to a variety of reasons, many of which may be well beyond their control, such as governmental policy changes, unexpected market sluggishness and even natural disasters, which can force affected businesses to shut down while waiting for insurance payouts to help cover debts.
Credit insurance covers organizations for losses incurred as a result of non-payment, providing the continued liquidity a business needs to remain in the black. While many external influences can be predicted before they hit, many can come as a surprise. Credit insurance is fail-safe fall-back measure in any circumstance.
3. International Market Risk
Companies trading internationally rely on the stability of foreign business environments. Factors such as regulatory changes, goods confiscation, civil unrest, and even the sovereign’s willingness to pay can pose risks to organizations making cross-border transactions.
Most frequently, fluctuations of international currency markets hit businesses hardest of all. A weaker U.S. dollar might be good news for Australians travelling to California, but it can be bad news for trading companies, as volatile currency markets can upset the finely-balanced profit margins offered by established currency differences.
While foreign currency fluctuations can see companies fail to pay their bills on time, credit insurers can provide cover and can advise organizations on country-specific risks.
4. Reduced Cash Flow
Buyers who cannot pay at the agreed time or are unable to pay at all can restrict an organization’s cash flow. This can cripple the organization and damage relationships with other trading partners.
When a primary buyer or multiple buyers can’t pay, companies are exposed to a heightened risk of insolvency. Insufficient liquidity resulting from reduced cash flow can stunt business growth. However, credit insurance can provide liquid funds that enable an organization to continue operating by maintaining its cash flow.
While most organisations can take steps to prepare for many external market factors with the potential to affect cash flow, such as seasonal market trends and long-term business cycles, many other external factors are likely to be entirely unexpected. In the absence of firm information to help businesses prepare for crises, credit insurance provides a dependable solution.