In today’s competitive marketplace, all of us are looking for ways to differentiate ourselves and gain an advantage in winning business. The extension of credit is one of those strategic areas that can help do this.
Managing Financial Risk
It has been said that financial risk in business now exceeds physical risk; the risk of fire, flood or other traditional risks. The Great Recession proved that companies in all industries, including financial institutions can become highly leveraged and that bankruptcy is a legal tool rather than purely a financial necessity as it has always been considered.
Credit insurance is a tool that helps manage financial risk by transferring that risk of non-payment to the insurance company. In doing so, it offers a competitive advantage to companies in three ways.
Extend More Credit… Safely
Most credit departments start new customers off at lower credit limits until a payment history is established. The credit departments who use Credit Insurance are far more aggressive from the onset of their relationships with new customers and are able to capture more revenue and more market share from their competitors who are not using Credit Insurance.
Let’s say that a prospect wants to buy $100,000 worth of widgets and company A is willing to give 60 day credit terms backed by credit insurance which will let the prospect buy the full amount they desire. Company B on the other hand will only offer $25,000 credit until the prospect can show they will pay on time. Which company is the prospect more likely to buy from?
In Company B, it’s wise not to take too much risk but by using a Credit Insurance policy to both measure the risk and transfer it to the insurance company, they could increase sales very easily and avoid the financial risk entirely. This becomes a competitive sales advantage.
Improve Financial Statements
Most companies set aside a bad debt reserve. Let’s say they set aside $25,000 a year for their bad debt reserve. That $25,000 is only good for $25,000 worth of bad debt. If they invested that same $25,000 into a credit insurance premium, they would get on average $2,000,000-$4,000,000 worth of coverage. What protects the company better, $2,000,000-$4,000,000 in coverage or $25,000 in a reserve? The $25,000 insurance premium is leveraged many times to create more protection and allow the company to improve the financial statements by reducing their bad debt allowance or reserve.
Better Working Capital Finance
Because Credit Insurance protects receivables against customer default or slow-pay, lenders can increase loan capacities without increasing portfolio risk. In this competitive market, the lender who can advance against the largest pool of receivables often wins the new deal. Coface Credit Insurance can help you increase loan limits and reduce risk.
Combining Benefits
By combing the safe extension of credit to increase sales with a smaller bad debt reserve or allowance and greater access to working capital, companies gain a huge competitive advantage by using Credit Insurance from Coface.
For more information on how to gain these competitive advantages, please call or email me to discuss your specific situation.
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