What is trade credit?
Trade credit is a very important source of working capital financing for your business. It is short-term credit that suppliers of goods and services extend to the buyers they are doing business with. This is usually done so that the buyer (e.g., a small business) can enhance its sales. Trade credits come in handy when such suppliers enable the buyer to pay for the goods or services at a later agreed-to date. This cash is not paid immediately and the deferral of payment represents a source of finance.
Why do you need a trade credit insurance?
Trade credit insurance protects your business against unanticipated commercial or political risks. By minimizing the risk of buyers not paying up or paying late after you have reached an agreement, this insurance helps improve the quality of your business and enhances the growth of profits. Having a trade credit insurance gives you and your business confidence to give out tax credits to your customers, both old and new.
How trade credit insurance helps your business
- Supports sales expansion: Not all customers can pay instantly. If your business turns down everyone that can’t make full cash payments, it wouldn’t have the growth it deserves. However, you can easily give trade credits to your customers if you are covered by trade credit insurance. Your business will grow and expand and you don’t have to worry about inconveniences like late payment or nonpayment.
- Enhances your customer relationships: Say you’ve been dealing customers for a while and, for one reason or another, they can’t pay on time this time. What do you do? Easy. You can give them a trade credit and continue doing business with them. This will work out just fine, especially if you have trade credit insurance. You will enhance your relationship with your customers, because they will see you as trustworthy and understanding. Remember, the biggest gift to a business is a happy customer.
- You will lose only a little: To tell the truth, trade credit can cause complications. If the customer refuses to pay or delays paying you, the trade credit insurance will cover you for a percentage — ranging from 75 percent to 95 percent, depending on coverage type — of the invoice. You will lose, sure, but not as much as you would have lost had you not had trade credit insurance.
- Usually short term: Trade credit insurance usually lasts for only 12 months, and then it must be renewed. It is therefore very important that you make sure the customer pays within the stipulated time or update the insurance once the time elapses.
- Improves banking relationships and access to finance: Your relationship with banks will be much easier if you have trade credit insurance. Having a good relationship with the banks will do wonders because your business may have easier access to funds. This will come handy anytime your business needs a quick infusion of cash.
- Buyer gets a trade credit limit: You will have a say in how much trade credit your customer gets. Here’s why. When you register your business with a trade credit insurance company, the insurance company will grade your customer’s financial health and how your customer conducts business. This is grade will determine how much trade credit the customer will get. Know this, as a business owner, you will be less likely to advance trade credit to customers that are not likely to pay it back.
- Increased borrowing: Trade credit insurance can provide cost-effective access to working capital that can help you grow and avoid cash-flow crunches. Your credit insurance policy can help you maximize working capital availability from the receivables you pledge to your lender. Most ineligible receivables (including concentration of receivables with a few accounts and foreign receivables) can now be included in your borrowing base with your lender.
Trade credit will enhance the growth of your small business. However, to ensure that you do not lose money due to customer’s insolvency, it is best to get a trade credit insurance.