Accounts receivable insurance – what you need to know
The world of accounts receivable insurance can be confusing. Depending on your business and its needs, there are many different policies and insurers from which to choose. Picking the right one can be challenging if you aren’t familiar with this kind of insurance.
You may also be wondering if this type of insurance is worth it and how it can help your business. ALIGNED Insurance is here to help you make sense of accounts receivable insurance. Read on to learn more about its benefits, the cost, and how to find the right provider.
What are accounts receivable exactly?
First, let’s define accounts receivable. Accounts receivable (also referred to as AR) is money that customers still owe to your business. AR accumulates when you provide a good or service that your customer hasn’t paid for yet. It is essentially a line of credit as they receive your product before paying.
ARs vary in their terms. Most companies require customers to pay off their debt in a short amount of time. However, payment plans can range anywhere from a couple of days to a fiscal year. Companies list ARs on their balance sheets because customers are legally required to pay off their debt. On a balance sheet, AR is a current asset, which means that the debtor must may their balance in one year or less. AR is one of the many current assets that measures a business’s liquidity.
The importance of accounts receivable
AR represents money coming into your company. It is crucial to keep track of how much your customers owe you.
Too many companies neglect the importance of AR. If a business provides a product or service and doesn’t collect the payment, they will face a loss. Continuing to neglect AR will negatively affect your company’s profitability.
What is accounts receivable insurance?
Failing to collect a customer’s payment can be your fault, say when you forget to invoice them. But what about when you can’t collect payment for other reasons? Unforeseen circumstances can affect your ability to invoice customers.
This situation is where accounts receivable insurance becomes essential. This type of insurance protects you in the event that you can’t collect payment for reasons beyond your control. Any kind of company that provides goods/services ahead of payment can benefit from AR insurance. It lessens the risk of who and where you do business and ensures that you don’t lose profits.
AR insurance is particularly beneficial to those who participate in international trade. Doing business with foreign companies can be riskier because of factors beyond your control. AR insurance will protect you from factors like political changes, unregulated business practices etc.
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How to find the right accounts receivable insurance provider
Many financial institutions provide accounts receivable insurance. How do you go about finding the right provider? As you shop and compare your options, look for these three factors from your selected provider: customizable plans, flexible coverage, excellent customer support.
Customizable plans to suit your business needs
For starters, you should look for a provider that offers custom plans. Bespoke coverage will consider your business’s specific needs and ensure you get the best policy.
For instance, many basic policies cover you if a customer:
- Becomes insolvent, meaning they are unable to pay debts
- Changes ownership
- Files for bankruptcy
- Goes out of business
Flexible coverage across multiple types of accounts receivables
You may want to expand your policy so that it covers other circumstances. Choose a provider that will cover instances such as:
- Political unrest
- Economic downturns
- Natural disasters
- Seasonal business cycles
Excellent customer support and care
For any insurance provider, supporting your business should be their central concern. Exceptional customer support goes beyond friendly service. A good insurance broker should also:
- Have experience in the industry, serving companies that are in your area and similar to yours
- Take your business’s budget and other factors into consideration
- Walk you through the process and answer any questions you have
- Collect and manage the paperwork for the policy
Unfortunately, there are many accounts receivable insurance scams out there. Be sure to do your research before choosing a provider.
Is accounts receivable insurance worth getting?
Some companies neglect to get accounts receivable insurance because of the cost. In the short term, going without AR insurance may save you a little money. But without AR insurance, you risk severe consequences in the long run. For one, you won’t have protection if a customer doesn’t pay their debts. This vulnerability will have a significant impact on your profitability.
Let’s say your customer owes you $200,000, and your profit margin is 10%. If they fail to pay their debt, you would need to make an additional $2 million in sales to make up for the lost profit. But if you have AR insurance, the defaulted payment would be a lot less impactful on your bottom line.
AR insurance benefit your company because it:
- Protects your profitability
- Increases your overall cash flow
- Creates new investment opportunities
- Improves employee morale as it makes your business more stable
- Can help secure additional credit, loans etc.
Cost of accounts receivable insurance
Every business has a different rate for their receivable accounts insurance. The prices depend on factors, such as:
- The type of industry in which you operate
- Whether your business is domestic or international
- The customers with whom you work
- Any losses your company has experienced in the past
- The type of coverage you choose
- Payment terms
- Amount or type of deductible, retention or co-insurance
The rate is simply a percentage of your overall sales, so you only pay for what you sell.
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How ALIGNED Insurance can help you
AR insurance has been popular in Europe for many years.
In recent years, it has become more prevalent in North America. Companies are realizing that AR makes up a significant percentage of their assets. Without protection, they risk losing profits.
ALIGNED Insurance can provide the AR insurance your business needs. We are one of the top business insurance providers in Canada, having more than 1,600 business clients across the country.
Clients continually choose us because:
- We provide a service guarantee.
- We provide tailor-made policies for all of our customers.
- Our experts specialize exclusively in business insurance.
- The professionals we assign to your case will be available the whole time.
- We value our clients and prioritize their needs.
Contact us today
It doesn’t matter what your industry is. Whether it’s big or small, domestic or international, your company can benefit from accounts receivable insurance.
Let ALIGNED Insurance brokers help you protect one of your most valuable business assets. Contact us today!