Commercial Receivables Insurance & Small Business Receivable Risks

An Effective Management Tool for Improved and Lower Cost Access to Business Capital and Better Receivables Control

Success through Risk Management

Every business owner seeks to minimize the financial risks inherent in his business operations and available profit opportunities. Every business capital source in fact will not only review your company for the degree of management success in this area, but in some cases will absolutely require it as a condition of financing. Examples abound – key-man life insurance, liability and comprehensive type coverages for all hard assets, equipment, autos, and fixtures, surety and bonding for key employees, and life insurance to the extent of any mortgage indebtedness.

Interestingly, despite its rank as probably the number one cause and/or notable area for business financial impairment and even loss, accounts receivable risk removal through an insurance medium had not, until recently, been evaluated by operating CEO’s or financial firms. The old view of management “precognition” respecting receivable quality and risks is no longer acceptable.

The seasoned business owner will seek any cost effective solution to minimize operational and financial risks, knowing that capital access will improve, costs will be lower, and profit opportunities through growth will increase – all reflecting reduced and in some cases, total removal of receivable risks. No longer does the successful firm simply “trust to the gods” as a reliable or accepted means of “credit risk management”.

Quite simply, to succeed in business, the CEO must manage the expected and the unexpected. The expected is managed by having the best qualified internal and external inputs with the most accurate information to make a reasoned decision among predictable alternates. The unexpected is managed by “insuring” the company against circumstances or situations which deviate from expected facts or events.

All funding for your company, either internally or externally generated, assumes correct risk management. What happens when any one of your key receivable accounts (even the largest) unpredictably is not paying on time; worst, not at all? Can your firm take the impact of any of your largest accounts as an immediate Chapter 11 player – no pay indefinitely? Will your source of financing agree to knowingly fill the void in cash flow (sometimes a very significant impact when viewed in terms of sales, inventory, and now total loss of goods/services sold)?

Minimizing risk through receivables insurance

Commercial receivable insurance is a very cost effective method to eliminate these problems; to make the unexpected, predictable and stable. There is very quieting and positive impact with the absolute knowledge that “you will always be paid for what you sell”. The insurance concept and benefits are simple and straightforward.

The policy can be structured in a number of different ways to meet the individual needs and concerns of the company. Either the entire receiveables portfolio can be covered or just a particular segment (i.e., the company’s top 25 exposures). Whether to share risk or enhance sales growth, the policy profile can be custom-tailored to meet the company’s needs. If used for financing purposes, the lending source can be named as beneficiary.

Immediate benefits include:

  • Elimination of expensive, non-deductible bad debt reserves with insurance costs fully deductible to the company;
  • With on-going credit investigations on all key clients (past, present, or future), the company has access to more reliable and better management tools for its sales strategies and receivable controls (prevention and minimizing losses);
  • Where available through your insurer, better coordinated and more successful collection efforts by seasoned professionals;
  • More reliable information and greater confidence for doing business in overseas markets;
  • Added confidence to allowing immediate increases in customer sales and even expanding into new market-customer bases; and
  • Adds certainty to cash flow and profit forecasts, which automatically lowers financing costs to the company with attendant greater lever-age opportunities.

For the company’s current or future needs for business capital or financing, access is automatically improved and attendant costs will certainly be lower. Quite often, the entire success of a financial package (both short and long term), will depend on management’s success in risk management and having the insurance coverages already in place.

The successful company will not wait until the financial source devotes valuable time (to your firm) to explain the point and/or even act to require the coverage. Business success has been described as anticipating cost effective solutions which accelerate your goals. Evaluating how your firm might minimize receivable risks and/or share them through insurance coverages is a suggested strategy for review.

Woodrow D. Wollesen President/Chairman, RBFF, President, Execunet, Inc., Glen Echo, MD (301-299-0486)