Managing Your Accounts Receivable: What if Your Customer Doesn’t Pay? Are You Covered?

Sean E Brady, CPA

Being in business is not easy considering common challenges such as labor issues, raising supply costs and slow paying customers, but not much stings worse than when a customer of yours defaults on their trade receivables and your company does not get paid for a product you have already produced and delivered.

The Stats

On average, 40% of a company’s assets are in the form of trade debts (i.e. accounts receivable). Sometimes the figure is far higher. It is often difficult or impossible for a company to predict which client will default on payment. Close to 50% of all payment defaults arise from vendors with whom stable and long-term trade relationships have been established.

An Example

The cost to a business of non-payment can create huge hurdles for your business to overcome. For example, if a company’s profit margin is 5% and one of its customer defaults on a debt of $100,000, the company will have to achieve additional sales of $2,000,000 to make up for the lost profits. To reiterate, you company will need to sell an additional $2,000,000 to make up for a customer who does not pay their $100,000 bill!

The loss of such cash flow can be devastating. Non-payment also weakens your company and can inhibit your business from paying obligation as they come due or to reinvest in itself for the future. A credit insurance policy helps in the management of your accounts receivables and compensates you in the event of non-payment.

There are many benefits including:

  • Better credit control and protection against catastrophic bad-debt losses
  • Better risk management through early warning systems (offered by insurers)
  • Better business planning through the elimination of unforeseen loss
  • Improved working capital from your lender because you have enhanced the quality of your accounts receivable with credit insurance;
  • Potential to better target sales, many trade insurer’s offer proprietary information that can be used to target new customers and markets and monitor existing customers
  • The benefit of the trade insurer’s collection capabilities and network
  • Improved cash flow, because you receive payment for unpaid invoices that are insured

These benefits can allow your company to not only protect from loss of payment by a customer, but allow you to safely expand sales, secure better borrowing terms with your lenders, reduce bad debt reserves (enhancing your company’s profitability) and leverage your credit insurer’s ability to assist in collection efforts.

How it works

If non-payment is suspected, you file a claim with your credit insurer. Typically claims are paid within 60 days on a domestic loss. Export losses may take a bit longer because of country waiting periods. Most trade credit insurers also offer a debt collection service to their customers.

The costs of credit insurance policy are typically nominal and very affordable considering the benefit they provide to your company. Policies are typically billed monthly or quarterly and require minimum reporting and effort to set up and maintain. Many policies costs reduce by a set percentage every year you company does not make a claim. Further, many insurers offer easy to use online policy management systems, where you can make credit requests, file a claim, and monitor your claims any time you want via the internet.

What to do

If you are interested protecting your company from loss of collection then please feel free to reach out to me or your CPA at Corrigan Krause. We will discuss your scenario, recommend a trusted credit insurance agent and assist you in the required reporting to ensure you get a policy that will fit your company’s needs.