Accounts receivable (AR) insurance is a topic that is becoming more and more popular as business owners look for a way to stay in business during the down economy. It is a good idea to know what this type of insurance is and isn’t before jumping on the train of companies looking for a quick fix.
First let’s gain an understanding of what account receivable insurance is. AR insurance is a lot like other types of insurance in that you pay a premium to an insurance company and in exchange for this premium the insurer will insure you against any disasters.
In the case of AR insurance, your company would pay a premium and in exchange for this premium, if your customers didn’t pay their invoices the insurance company would pay you in their place. Note that how much money you receive from the insurance company and what situations trigger an insurance payout depend on your agreement. Just like with health insurance, there are a myriad of different insurance agreements out there.
Why would a company want to pay this insurance? Some companies have tried to abuse this system just like some people try to abuse health insurance. Companies start offering credit to customers who they know won’t pay and then ask the insurer to make the payments. This is unethical, likely violates your agreement with the insurer, and there is a slim chance of actually getting away with this.
So if you can’t just drain the insurance company of money, what good is it to your company? Insurance should be relied upon only in extreme circumstances. If for some reason a tornado, hurricane, earthquake or tsunami completely destroyed one of your largest customers who happened to owe your company a big chunk of cash, then accounts receivable insurance would come in extremely handy.
I would recommend this type of insurance to any company who has large outstanding invoices or receivables from one source. It would also be a good idea to think about this type of insurance if all of your large customers are from a certain region that is prone to disaster.
There really is no best time to start insuring your accounts receivable. You aren’t going to know when a disaster strikes one of your largest customers, and by the time you do know it will be too late to obtain insurance.
If you are interested in insuring your accounts receivable, then it is a good idea to contact an agency that offers it. A quick google search for “accounts receivable insurance” should list several viable options.
Insurance is never the path to success, it is only a way to avoid complete failure. If you were hoping that this was a quick solution to all of your cash flow problems, it is not. However if you are looking to secure your corporation for the long haul, this might be a good solution for you.
Feel free to find out more information on other types of uses for accounts receivable like factoring and invoice discounting.