Editor's Note: Learn from a panel of experts and entrepreneurs who have successfully financed their own ventures and are helping others do it at the Thought Leaders Live 2013 event May 29, in Long Beach, Calif. Event and ticket information can be found here.
Managing your company's cash flow is a tough task when you're not sure your clients will pay what they owe. Rather than take a chance, consider credit insurance.
Credit insurance policies cover your accounts receivables, insuring your business in the case of non-payment. You tell the insurance company which accounts you want to cover, and you'd pay a monthly premium based on the creditworthiness of your client and the amount of credit you're extending to that client.
"Credit insurance has been around, but up until recently, it was really a very expensive proposition and really not affordable for small businesses," says Michael Zeldes, a senior vice president of HUB International Northeast, a business insurance broker.
These policies, also known as business credit insurance, trade insurance, bad debt insurance or accounts receivables insurance, may be a worthwhile investment, especially in this rocky economy.
How Credit Insurance Works
Credit insurance is appropriate for any business that extends credit to its clients.
Zeldes offers this example: Say a company has 50 customers and it sells widgets. Of those 50 customers, the widget-maker feels 20 of those companies are their most important customers because they buy the most merchandise.
The widget-maker can identify which of those companies they're most concerned about, perhaps because of past late payments or non-payment, or simply because of the amount of extended credit. The underwriter for the credit insurance policy will investigate those specific clients and approve the ones the policy would cover.
One of the biggest benefits: The underwriters will continue to monitor the financial health of those companies over time. You'll get regular reports from the insurance company about your clients, so if the client encounters financial difficulty, you'll learn about it quickly.
It could really help you stay in business," says Michelle Dunn, credit and debt collection expert and author of the Collecting Money book series.
During a recession, you might be thinking that insurance costs are a luxury you can't afford, but there's no downside to applying.
"It's sort of a no-brainer," Zeldes says, because underwriters are very willing to evaluate the risks presented by your clients for free, and no one gets paid unless you buy a policy.
You can also control the cost of the policy by deciding how many clients you'd like to cover, and which insurer to use. Depending on the policy, you can choose how many days late a payment has to be before the policy kicks in. You can also select the percentage of the unpaid invoice the policy would pay.
Other Financial Safety Nets
If you extend credit for your clients but you're not ready for credit insurance, the only other options is to do your own due diligence. Do what you can to check the credit worthiness of a company before you extend credit, said Dunn, but that can be a challenge.
"You can do your own risk management. Only do business with those you know will pay you," Dunn says. "In a good economy, you might say that you could sell to anyone, but in a bad economy, who knows if even Wal-Mart is a good bet."