When most business owners and finance managers hear the term, they know this to be a product to protect their accounts receivables. Other terms used for this product are Accounts Receivable Insurance, Trade Receivable Insurance or Bad Debt Insurance. But to most non-financial people, they will think that credit insurance is personal lines product protecting an individual if they become sick or lose a job and they have loans and credit cards requiring repayment during a temporary financial setback. The two must not be confused, although both are similar in the way that they protect the creditor (bank or company) from non-payment. For the purpose of this article the term Credit Insurance should be used in relation to commercial accounts receivables and for simplicity sake let us use Accounts Receivable Insurance as the title for this product.
First let’s define what are accounts receivables? Simply put, a receivable is an amount of money owed to one party from another party in exchange for a good or service. It is a promise to pay at some date in the future. Usually no longer then 6 months, but normally anywhere from 30 to 60 days from goods being shipped or services rendered. A real life example would be a manufacture of hammers that relies on hardware stores, mail order houses and national or regional home improvement chains to sell their hammers. The hammer manufacture will sell an amount of hammers to a store, but not require payment until 30 days from shipment. The hammer manufacturer will categorize the shipment as a sale, but since money has not exchanged hands there has to be some other way to recognize the exchange of assets for accounting purposes. The receivable is an “I.O.U” of sorts. This allows the hammer manufactures customer to sell the hammers, take its profit and then repay the hammer manufacture for the hammers. The receivable is an asset of the manufacture and should be treated as any other asset such as cash, buildings, equipment or anything else of monetary value.
What happens if the accounts receivable are not paid? This is a big problem and it has increased exponentially since the end of 2007 as the economy began to slow. This is what Account Receivable Insurance is made for.
First let’s define what are accounts receivables? Simply put, a receivable is an amount of money owed to one party from another party in exchange for a good or service. It is a promise to pay at some date in the future. Usually no longer then 6 months, but normally anywhere from 30 to 60 days from goods being shipped or services rendered. A real life example would be a manufacture of hammers that relies on hardware stores, mail order houses and national or regional home improvement chains to sell their hammers. The hammer manufacture will sell an amount of hammers to a store, but not require payment until 30 days from shipment. The hammer manufacturer will categorize the shipment as a sale, but since money has not exchanged hands there has to be some other way to recognize the exchange of assets for accounting purposes. The receivable is an “I.O.U” of sorts. This allows the hammer manufactures customer to sell the hammers, take its profit and then repay the hammer manufacture for the hammers. The receivable is an asset of the manufacture and should be treated as any other asset such as cash, buildings, equipment or anything else of monetary value.
What happens if the accounts receivable are not paid? This is a big problem and it has increased exponentially since the end of 2007 as the economy began to slow. This is what Account Receivable Insurance is made for.
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