Risk comes from not knowing what you’re doing. Luckily, in today’s vast insurance industry, there are several options you can pursue to protect your business from these risks. One of which is trade credit insurance, which safeguards an enterprise against possible losses in customer failure to settle payables.
Statistics revealed that 277,674 trading businesses exited their respective industries. Additionally, 97% of small businesses in Australia fail after three years of operation. So if you’re thinking of preserving your interests, it’s time for you to protect your business from bad debts.
Basic Terminologies
Accounts Receivable
This receivable represents a claim arising from your sale of goods or services to consumers. Promissory notes do not usually support them. Hence, the risk of uncollectible portions.
Credit sales
As an enterprise, you sell on credit rather than only for cash to increase sales and increase income.
However, an entity that sells on credit assumes the possibility that some customers will not pay their accounts.
Bad debt loss
When an account becomes uncollectible, the entity has sustained a bad debt loss. This loss is simply one of the distribution costs of doing business on credit.
Importance of Risk Management
It empowers your firm as it helps to identify and deal with potential threats. As a result, you can create an action plan to address such unfortunate results’ potential impact and occurrences.
Risk Analysis Process
1. Identify risks
This process allows you to rundown all risks and priorities those that need urgent attention.
2. Assess risks
This one answers the following questions:
- How it may potentially harm or bring losses to the business?
- What is the amount involved?
- What possibly caused it?
- How do the threats affect the company?
3. Control Risk
This starting point is where you already need to decide the proper course of action for the assessment.
Your organization’s response may take the following forms:
- Avoidance – you may not take the risk by avoiding the activity with associated setbacks. However, this move is impossible because all businesses need to embrace credit sales, which then cause credit risk.
- Mitigation – your company, may take the risk but tries to lower the impact. As you can see, this response perfectly encapsulates the idea of trade credit insurance. Credit risk is unavoidable no matter how hard you try. Therefore, the solution you may take is to try to lessen the undesirable catch.
- Acceptance – this one says the” before the fact” response. However, you only recognise the setbacks and do nothing, regardless of their dangers, in this case.
4. Apply the control
If you’re dealing with bad debts, mitigation is your solution in the form of trade credit insurance.
Key Advantages
- transfers the credit risks
- extends the open account terms, i.e., increases credit limits for buyers
- real-time risk monitoring for buyers
- enhances credit management practices of your firm
- allows you to grow your market share safely
- more remarkable ability to access finance options, and more.
Trade Credit insurance guards your tomorrow. It grants you the freedom to go beyond your comfort zones. Therefore, it promotes change and peace of mind. So if you want to achieve it, apply now before it’s too late.