I came across this article by Alexander Kamitz of Prima in Vienna Austria.
He highlights 6 key things to show how credit insurance directly benefits your Profit.
- Credit Insurance lets you make the right decisions.
- Credit Insurance supports internal procedures.
- Credit Insurance maybe used as collateral.
- Credit Insurance acts as an early warning mechanism.
- Credit Insurance eases the decision making in a Group of companies.
- Credit Insurance covers your losses.
The full article is below and well worth a read.
Running a business means acting in many different fields.
There are human resource issues, IT issues, finance issues, marketing issues, production issues… and many many more. And there is insurance. After all, in whichever field we invest resources and funds, in the end all this effort is aiming to pay off as profit. Profit is what running is business is for.
Which role does insurance play in this context?
Well, that cannot be easily answered. Because not each kind of insurance is the same.
Doubtlessly insurance is needed for many different purposes. And doubtlessly many kinds of insurance are a must have for each business.
Let’s take fire insurance. Everyone has it.
Fire insurance may secure a company’s existence. But will it have a positive effect on profit?
Well, eventually it may.
Anytime your company’s property is damaged by fire, your profit will be restored through payments by your insurance provider.
Luckily this rarely (if ever) happens to most companies. Therefore in most of the years the premium you pay for fire insurance will have a negative effect on your profit. It’s just costs. Nonetheless, it’s important to point out that it is of course essential to have fire insurance in place. However, this is how insurance is often looked upon. And for many kinds of insurance this may be true. But it’s not true when it comes to credit insurance. Yes, credit insurance as well as other kinds of insurance may secure a company’s existence. A major loss due to an insolvent buyer has killed many formerly successful operating businesses. All alone for this fact it is essential to have credit insurance in place, as well as fire insurance and others. And yes, credit insurance means costs. Each year. Even though none of your buyers turns insolvent. But what makes credit insurance different now? Where is the additional link between credit insurance and profit? Well, credit insurance is a very unique kind of insurance. In fact it is not only insurance, it’s more of a toolbox that gives you additional benefits which will have a direct impact on profit, even though none of your buyers is insolvent.
Why is that?
1. Credit insurance lets you make the right decisions.
And lets you make decisions you eventually wouldn’t have made without credit insurance.
Let me just give you one (out of many) example. Imagine a new prospect comes knocking and wants to buy goods worth a major sum.
You never heard of that new buyer. Maybe it is from another country. Maybe from a country in which you’ve not yet sold your goods.
Which decision will you make?
Will you supply goods worth 500.000 Euro on open account?
Well, if you take things serious you will start a procedure in order to assess your new buyer’s credit worthiness.
Buy information agency reports. Check annual reports and balance sheets. And finally you will make a credit decision.
However, whichever decision you make, in the end it’s still based on insecurity.
Because you will not have a guarantee, that your buyer will pay.
A decision made under the influence of insecurity may force you to be restrictive.
Maybe by starting the new business relationship more carefully. By supplying smaller amounts of goods. Or by insisting on short payment terms or even prepayment or additional securities (bank guarantees etc.).
Maybe your new buyer will not like this approach and look somewhere else.
Here’s where credit insurance steps in.
Probably your buyer is one already being monitored for years by your credit insurance provider.
What if someone would give you a promise that your new buyer will pay. The full 500.000 Euro. Credit insurance gives you that promise.
It lets you make a sales decision you eventually wouldn’t have made without credit insurance.
It lets you more easily approach new clients. Expand your business with existing clients.
And lets you save costs and handling effort you spend for other kinds of securities.
Because from the time you have credit insurance in place, you no longer need to make decisions based on insecurity.
Credit insurance lets you change your behavior. Without being at risk. Credit insurance may let you increase sales and thus may increase profit.
2. Credit insurance supports internal procedures.
Each company has its credit management.
You will not only have one case like the above mentioned new buyer, but many of them. Maybe even many of them a day.
And you will have a bunch of existing buyers whose credit worthiness needs to be monitored.
You will have your internal procedures in order to monitor your huge portfolio of buyers.
Generating sales decisions for new buyers, monitoring existing buyers, handling and securing your huge trade credit portfolio means effort.
However these procedures are organized, you will need manpower, you will need to spend money on buying information and and and….
Credit insurance keeps your total trade credit portfolio monitored.
In case once your buyers turns risky, you will be informed on time.
Credit insurance lets you save money spent for internal credit management procedures and thus lets you increase your profit.
3. Credit insurance may be used as collateral
– and can be assigned to any financing institution, bank or factoring provider.
It eventually lets you open new lines of credit at an eventually lower price and thus lets you increase profit.
4. Credit insurance acts as an early warning mechanism
– and ideally lets you stop selling to buyers before they turn insolvent.
Being a creditor within an insolvency procedure again means effort.
Avoiding this effort lets you save money and thus increase your profit.
5. If you are a group of companies,
– you can roll out credit insurance to other related business units and assure standardized credit management rules throughout the whole group of companies. You can have a centralized monitoring.
Credit insurance will ease the decision making processes within your group and thus increase your profit.
6. And, last but not least, credit insurance refunds your losses
– you suffer from insolvent buyers. And thus increases your profit.
I could add another number of facts how credit insurance can have a direct impact on a company’s profit.
Those are leading more into the details of each company’s internal procedures and may differ from company to company.
However, what I wanted to point out is, that in many cases credit insurance pays for itself and leaves you better off, even though you did not suffer from losses in the past.
In case you should belong to those few lucky ones not having to deal with insolvent buyers, it is probably because you have a very good and efficient internal credit management.
Especially in a situation like this you can draw the most benefits out of credit insurance, ease your internal procedures, make better decisions and increase your profit.