Accounts Receivable Insurance: Explained
Accounts Receivable Insurance Defined
Accounts receivable insurance exists to protect businesses from the chance that clients do not pay what they have promised to pay. It is a kind of credit insurance seen almost entirely in the commercial and business world.
Why have accounts receivable insurance?
Accounts receivable insurance is helpful if, for some reason or another, you do not have the chance to run credit checks on those upon whom you depend for income. This is a common thing amongst new, rapidly expanding companies.
Even if one can run credit checks, it may be a good thing to have accounts receivable insurance, especially in times of economic uncertainty or political instability, because one never knows when a company or individual who owes your business money will go bankrupt, disappear, or otherwise be unable to pay as promised.
Two Different Types
There are two forms which accounts receivable insurance may take:
- The first is multi-buyer insurance. This would be if you have multiple receivables that you want to insure, and a broader range of clients.
- The second is key buyer insurance. This is appropriate if you have particularly large accounts receivable from a single source.
Examples of Accounts Receivable Insurance Being Useful
An Argument for Key Buyer Accounts Receivable Insurance
BillyBaubles is the primary provider of military awards and decorations to the island nation of Simonia. The two parties have had many exchanges over a broad range of years, and BillyBaubles has become almost entirely dependent on Simonia for orders. In a tragic natural disaster (perhaps due to global climate change and rising sea levels), Simonia sinks, and the government ceases to exist. BillyBaubles is distraught - right before the disaster, Simonia had ordered a huge volume of platinum medals of honor, and BillyBaubles had not yet been paid for the order. If BillyBaubles had invested in accounts receivable insurance, they could have still gotten payment for those platinum medals. Guess they learned their lesson!
An Argument For Multi-Buyer Accounts Receivable Insurance
Business is booming for Samantha's gold-plated cupcake business. People are buying her glittering confections right and left, which has encouraged her to expand and open new confectionaries across the country. One Wednesday morning, however, Samantha wakes up to discover that the vast majority of her clients (wealthy stockbrokers) had gone committed seppuku due to a new crash in the economy that completely drained them of wealth. Thank goodness Samantha had accounts receivable insurance! Even though many of her buyers could not pay for the cakes she sold, she received payment.
What if Something Happens to MY Business?
Say a dreadful fire tore through your offices one afternoon (look like Shane was lighting his farts on fire again...) and you lost all of your accounts receivable records in the blazing inferno. Interestingly, accounts receivable insurance can help you there!