Trade Credit Insurance is commonly deployed by executives because they fear their company is at risk for losses, due to customer defaults or slow payments. However, leading private equity and portfolio companies utilize credit insurance to enhance receivables valuation, remove political risk, boost funding relationships, and mitigate crises. This helps them efficiently conduct due diligence and strengthen their position in transaction negotiations. Credit Insurance is a tool, globally underutilized, that protects balance sheets and profit margins.
Private Equity and Trade Credit Insurance
Enhance Accounts Receivable Valuation
A foundational component of Trade Credit Insurance involves independent and substantial underwriting of the accounts receivable of a company. Property, inventory, and employees are usually considered part of a company’s risk strategy. However, the largest asset–accounts receivable–is often left unprotected because of predominantly objective analysis. Buy side firms can receive significant reassurance in the isolation from objective and cultural analysis by the seller, which benefits both the buyer, seller and lenders looking to participate in the transaction.
Political Risk for Foreign Customers
Trade Credit Insurance insures the risk of non-payment by foreign buyers due to political unrest, revised monetary policy, currency issues, expropriation, and many other reasons. The improvement of data sharing and analytics has improved the ability to underwrite foreign buyers. In an ever-fluctuating globalized marketplace, political risk will remain a significant and dynamic risk. We can minimize credit exposure through political risk with a trade credit insurance policy that empowers exporters to operate around the world–confidently.
Every company that you sell to has different exposures, but ALL are susceptible to major economic fluctuations. Even the strongest balance sheet could have short- or long-term impacts on their ability to meet their obligations. When it comes to crisis mitigation, the question is not if; it’s when. The COVID-19 pandemic offers us one example of that.
Boost Funding Relationships
Trade credit insurance provides banks and funding partners COMFORT in monitoring the performance of the largest asset on the balance sheet. With eliminating the risks associated with AR, debt tied to the receivables both pre- and post-acquisition is enhanced. Many times, it also allows funding partners to lower the interest rate and covenants tied to the debt, which removes any buy-side handcuffs.