How to Protect your Cash Flow with Trade Credit Insurance

Cash flow is the life blood of any business and is the primary indicator of business health.

A company can run a non-profitable business for years, but if they don’t have cash, they may be in trouble.

Put simply, cash flow is the movement of money in and out of your business. Cash needs to be monitored, protected and controlled to maintain a healthy business. The minute a company is out of cash, serious problems begin to compound.

When a customer defaults on payment, this can have a serious impact on maintaining your solid cash flow. Defaults put a hold on your ability to trade without that expected cash flow present.

Good cash management can help you avoid the downsides of cash crises and give you a commercial edge in all your transactions. Here are the key steps any business should take to proactively protect their cash flow.

Build a strong risk management strategy.

A good risk management strategy is the foundation for cash flow protection. As part of a risk management strategy, companies should be confident that their customer is going to pay or know that they can rely on a trusted third-party for protection if a customer cannot pay. This protects cash flow by making sure payments are guaranteed one way or another.

It is prudent to have a solid risk management structure that includes insuring your account receivables. Trade credit insurance serves as an overlay on steps the company is already taking, such as assessing the credit worthiness of the buyer throughout their relationship, monitoring their finances and mentions in the press.

Using trade credit insurance as a guarantee of payment also makes a business more stable from a banking perspective. Banks view companies with trade credit insurance more favorably. If banks know they are lending against receivables that are protected by credit insurance, they are more likely to extend larger credit terms.

Know your customer.

Knowing your customer is key. Beyond a regulatory standpoint, companies need to know whether or not they will get paid if they sell to their customer on credit terms. A company should never go into a new trading relationship feeling uncertain about their customer’s ability to pay.

Practicing due diligence at the beginning of a new relationship with a customer brings peace of mind on their ability to provide timely payment. Some key things to look for when vetting a new customer include how long they have been in business, how large their company is, what they’re using your product for within the supply chain and what that industry sector looks like. Additionally, understanding the supply chain from every level will give you more confidence when offering credit terms for timely payment.

At Atradius, when our risk team is underwriting a new customer, they are looking at that customer’s ability to repay over the short term, a maximum 180 days. The risk team then analyzes what sector the customer is in, what their position is in that supply chain, where they are purchasing from, and other monitoring of their payment history and recent news. From there, the team will make a recommendation on whether or not the customer is worthy of insuring and trusting with your credit.

In partnership with our clients, we give our educated opinion on their customer’s credit worthiness to protect them from defaults instead of dictating who their trade partners should be.

Use Days Sales Outstanding (DSO) to your advantage.

As businesses grow and enter into agreements with new customers and markets, it is often a requirement to offer credit terms. The lower the DSO you can offer, the better cash flow will be as those receivables turn around quicker.

When new customers or new markets come in, they almost always want longer terms as they have their own cash flow management to worry about. Many customers are dealing with a cash crunch amongst multiple suppliers throughout their supply chain who need to be paid. This can force customers to take out additional cash from the bank to shore up cash flow in the meantime. If a company can prove to their banker that they already have their receivables insured by trade credit insurance, the bank will be much more likely to lend money to help close that funding gap.

Communication with customers is key.

An open line of communication with your customers prevents any excuses when collection day comes. Something as simple as calling your customer on delivery day to confirm that everything arrived as promised and to sort out any problems at that time, makes a big difference. Confirm the amount and due date on the phone at the time of delivery to secure the customer’s commitment to pay. This addresses any disputes about the product delivery at payment time, as they have already confirmed that everything was delivered as promised.

A good rule of thumb to avoid late payments is to begin invoicing as soon as a product is delivered and start collection before the debt is due.

Managing cash flow is all about managing risk. Just as you would insure your factories and operations, insuring your receivables can make or break solid cash flow. That gap in cash flow when a large customer defaults can be much more difficult to fill without the security of trade credit insurance.