Accounts Receivable Insurance

Accounts Receivable Insurance, also known as Trade Credit Insurance or Receivables Insurance, is a type of insurance coverage that protects businesses against the risk of non-payment or insolvency of their customers. It provides financial protection for accounts receivable, which are outstanding invoices owed to the insured business by its customers.

Background:

Accounts receivable represent the amounts owed to a business for goods or services that have been provided on credit. While extending credit to customers can be beneficial for business growth, it also exposes the business to the risk of non-payment or the inability of customers to fulfill their financial obligations. Accounts Receivable Insurance helps mitigate these risks by providing coverage for losses incurred due to customer non-payment, insolvency, or default.

Accounts Receivable Insurance typically covers the following:

1. Non-payment by customer: If a customer fails to pay their outstanding invoice due to financial difficulties, bankruptcy, or other reasons covered by the policy, the insurance carrier will reimburse the insured business for the loss.

2. Insolvency of customers: If a customer becomes insolvent and is unable to pay their debts, Accounts Receivable Insurance would cover the resulting financial loss incurred by the insured business.

3. Protracted default: This coverage applies when a customer fails to make payment within an agreed-upon period, typically beyond a specified number of days past the due date. The insurance carrier would reimburse the insured business for the loss.

4. Legal fees and collection expenses: Some policies may also cover the legal fees and expenses incurred in collection efforts against delinquent accounts.

Real-life scenarios:

1. Customer bankruptcy: A business has a significant amount of outstanding invoices with a customer that suddenly declares bankruptcy. Accounts Receivable Insurance would cover the financial loss incurred by the business due to the non-payment of those invoices.

2. Economic downturn: A business operates in an industry heavily impacted by an economic downturn, and several customers face financial struggles, leading to non-payment of their invoices. Accounts Receivable Insurance would provide coverage for the resulting losses incurred by the business.

Accounts Receivable Insurance is particularly beneficial for businesses that rely on credit sales or have a concentration of revenue with a small number of customers. By providing coverage for potential customer defaults or insolvencies, it helps protect the financial stability of businesses and enables them to continue operating and growing even in challenging economic conditions.