Why Your Business Needs Account Receivable Insurance

Shawn Plummer

CEO, The Annuity Expert

In the dynamic business world, unexpected events are par for the course. What if there’s a safety net that could protect your business’s financial well-being during challenging times? Enter the realm of account receivable insurance. Today, we’ll delve deep into what this insurance is, why your business might need it, and how it can offer a reassuring safety net for your operations.

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What Is Account Receivable Insurance?

Account receivable insurance, also called accounts receivable insurance coverage, is a type of business insurance that protects a company against the risk of non-payment by its customers. Imagine extending credit to a client who later faces bankruptcy or financial challenges and cannot settle their debt. This insurance ensures your business doesn’t bear the brunt of that loss.

Example: Think of a manufacturer who supplies products to a large retailer on a 60-day payment term. If that retailer goes bankrupt within that timeframe, the manufacturer could face significant financial losses. With accounts receivable insurance, a significant portion of that outstanding amount would be covered, shielding the manufacturer from a potential financial crisis.

Account Receivable Insurance

How Does Accounts Receivable Insurance Work?

At its core, this insurance operates like any other coverage. Once you’ve purchased a policy, if a client fails to pay an invoice due to insolvency or other covered reasons, the insurance company compensates you for a significant portion of the outstanding amount based on the terms of your policy.

Example: A software development firm contracts with a startup for a six-month project. Halfway through, the startup faces financial challenges and can’t pay for services rendered. With the protection of accounts receivable insurance, the software firm can claim a substantial portion of this unpaid amount, ensuring continuous cash flow.

Who Needs Account Receivable Insurance?

Almost any business that provides goods or services on credit terms can benefit from this insurance. Specifically:

  • B2B Companies: Businesses selling to other businesses on credit terms are prime candidates.
  • Exporters: Those selling products or services internationally can hedge against political risks or other uncertainties.
  • Growth-Oriented Firms: If you plan to expand, this coverage can reassure potential investors or lenders about your cash flow stability.

Example: A local textile company expands its horizons and exports goods to various international markets. Given the uncertainties and new challenges associated with global trade, having accounts receivable insurance becomes crucial to safeguard against potential non-payments from international clients.

Why Do Businesses Need This Insurance?

  • Financial Stability: It ensures a steady cash flow by reducing non-payment risks.
  • Competitive Edge: Offering better credit terms (backed by your insurance) can give you an edge over competitors.
  • Confidence in Expansion: It supports safe business growth, particularly in unfamiliar markets.

Example: An e-commerce platform to outrun competitors offers extended credit terms to its suppliers. While this move attracts more suppliers to the platform, the associated risks increase. However, with accounts receivable insurance, the platform can confidently offer these attractive terms, knowing they have a safety net.

Accounts Receivable Insurance

Other Types of Business Insurance Needed Include:

  • General Liability Insurance: Protection against physical injuries or property damage.
  • Property Insurance: Covers business property against theft, fire, or other damages.
  • Workers’ Compensation: Covers medical expenses and wage replacement if an employee gets injured.

Each type of insurance caters to specific business needs. For instance, while accounts receivable insurance focuses on your cash flow, property insurance ensures your physical assets are safe.

Account Receivable Insurance: Conclusion

Account receivable insurance isn’t just a luxury; it’s necessary for many businesses. In an ever-evolving economic landscape, it ensures that your business remains financially robust, no matter what challenges your clients may face. Whether you’re a seasoned enterprise or a fledgling startup, having this safety net can be the difference between thriving and barely surviving. Consider it an investment in the future stability and success of your business.

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Frequently Asked Questions

Do I need account receivable insurance?

Whether you need accounts receivable insurance depends on your business’s specifics. This insurance can protect your company from unpaid invoices due to client bankruptcy or default. Considering accounts receivable insurance could be prudent if a significant portion of your revenue depends on a few clients or if you work with high-risk clients. Evaluate the potential risk and make an informed decision.

What is an account receivable insurance policy?

An accounts receivable insurance policy, also known as trade credit insurance, protects a business from the risk of non-payment by its customers. Suppose a customer fails to pay within the agreed terms due to bankruptcy or other financial instability. In that case, the policy covers a substantial portion of the owed amount, helping to mitigate financial loss for the business. It can enhance financial security and facilitate safer business expansion.

What should be included in accounts receivable insurance?

An accounts receivable insurance policy should ideally include coverage for bad debts arising from a customer’s bankruptcy, insolvency, or protracted default. It should offer risk assessment of your clients to help manage credit risks proactively. The policy should provide for collection services for unpaid invoices. Moreover, it may offer global protection if your clients are internationally based. Tailoring the policy to suit your business needs and client portfolio is essential.

Do you have to pay taxes on accounts receivable?

Accounts receivable are not immediately taxable because they represent revenue that is earned but not yet received. However, once you receive the payment, it becomes taxable income. If you use the accrual method of accounting, you recognize income when earned, not when received, and thus, you would pay taxes on accounts receivables in the year they are invoiced. It is always advisable to consult with a tax professional for guidance tailored to your specific circumstances.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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