If your business is like most, it probably has several critical financial obligations that must be met each month—regardless of what economic conditions are prevailing. This can include payments for inventory, employee salaries, and other fixed costs.
Protecting Your Organization Against Catastrophic Loss
But if your company’s biggest customer suddenly went bankrupt or was unable to make payment, you could find yourself struggling to meet these obligations and risking the future of your business. Credit insurance can help protect your company against this type of catastrophic loss.
Protection Against Non-Payment or Bankruptcy
Credit insurance is insurance that is taken out on your business’s customers and insures the payment of services purchased from your organization. If your customer goes bankrupt, your credit insurance would help ensure you get paid—whether it’s finding a way to collect the funds from the customer or your insurance provider covers the payment.
As we’ve seen over the last couple of years, market fluctuations simply can’t be predicted. This ebb and flow of demand creates market leaders overnight, similar to the boom in Personal Protective Equipment (PPE) production or demand for software that supports online learning, all of which don’t appear to be slowing down any. Conversely, industries such as home fitness experienced a dramatic increase in demand, but that demand has come to a screeching halt now that states are reducing pandemic restrictions and re-opening gyms.
Understanding How It Works
It’s not uncommon for organizations to have a significant amount of revenue coming from one or two large customers. Regardless of what state the economy is in, this dependency can bring risks for an organization, bringing about the critical question of—what would happen if your largest customer went bankrupt?
Let’s take a look at an example:
Customer A generates about $500,000 worth of revenue for your organization each year. Your organization is operating at a 10% profit margin. If Customer A filed for bankruptcy and could no longer make payment for services they purchased from your organization, that would cause a 5 million dollar loss to your top line.
Sounds scary, right?
Let’s take a look at what this situation would look like with credit insurance:
In this scenario, Customer A still generates about $500,000 worth of revenue for your organization each year and your company continues to operate at a 10% profit margin. However, your customer goes bankrupt and can no longer pay for the services they have already purchased and received from your organization.
But since you have credit insurance, you can breathe easy—because you’re getting paid even though your customer has filed for bankruptcy. Your team planned ahead to mitigate risks of non-payment before they could occur. Your credit insurance provider will help cover the payment for services rendered by the organization, working with you and Customer A to collect the funds.
Every company that you do business with brings risk to your organization—whether it’s the risk of non-payment, the growing dependency, or the risk of them going out of business. With credit insurance, you can confidently do business with customers of all sizes, knowing that you will be paid. Learn more about how credit insurance can protect your organization here.