A/R Insurance Goes Mainstream, Embraces SMEs

Though it’s been around for a while, business insurance has yet to truly infiltrate the accounts receivable section of the balance sheet. That’s changing as enterprises small and large do business across borders and currencies. One insurance company, Waldorf Growth Partners, sees opportunity ahead, especially with small and medium firms. Here’s what David Waldorf, who heads the eponymous firm as chief executive officer, had to say about coverage that insures payment in a world of political and economic risk.

PYMNTS: Is this truly the first accounts receivable (A/R) insurance out on the market today? It seems like this is something that should have been available to suppliers sooner!

DW: A/R insurance has been around for approximately 100 years, and there are many insurers in the market. However, this product has not been made available to SMEs (particularly those with less than $4 million in annual revenues) in the United States until now.

What is new about our offering is that it makes this important coverage available in a streamlined, cost-efficient fashion to SMEs and provides access to coverage from a Fortune 100, A-rated American insurance carrier.

In addition, we offer non-cancellable buyer limits for SMEs. No other carrier is offering this coverage enhancement for our market segment.

As a result, buyer limits that are approved by us at inception of the policy cannot be reduced or withdrawn during the 12-month policy term. Our competitors in this segment are offering cancellable buyer limits.

PYMNTS: How exactly does this solution work? What happens if I’m a small supplier, and my corporate buyer keeps extending their payment terms, or goes bankrupt and isn’t able to pay, or simply goes MIA?

DW: Coverage applies to non-payment or late payment from domestic and international customers. Specifically, it covers commercial risks including insolvency of customers, Chapter 7, 11 or equivalent in country of domicile, protracted default, continued delinquency or inability to pay.

It also covers non-payment or late payment due to political risks, including currency inconvertibility, exchange transfer risk, import/export embargo and license cancellation.

The trigger for submitting a claim is a certain number of days past a maximum extension period (typically 60 days for domestic buyers and 90 for international). This applies if your client is bankrupt, MIA or simply unable to pay. Trade disputes and currency fluctuations are not covered by these policies.

PYMNTS: Is your A/R insurance offering comparable to a factoring or invoice financing solution?

DW: A/R insurance can be used to enhance a portfolio factoring facility or even just secure it in the first place. A/R insurance can also be used in combination with commercial finance to replace a factoring program.

In these situations, the policy proceeds are assigned by the policyholder to the lender, thereby enhancing the receivables pledged as collateral. This frequently lowers the cost of debt and increases the amount of capital available to small businesses.

The service is available to suppliers and wholesalers that work with both domestic and international corporate buyers.

PYMNTS: How does an overseas buyer increase the risk of late or non-payment for suppliers, and how does foreign exchange factor into that challenge, if at all?

DW: Overseas receivables have very different risk profiles than American ones. The political risk coverages I mentioned earlier are some of those. Typically, payment terms are longer for export sales. As a general rule of thumb, the longer the credit terms, the higher the risk of non-payment.

From a practical perspective, many exporters insure receivables because pursuing collections is an expensive and onerous task. Think of the different bankruptcy laws, languages, customs, etc. you have to navigate to collect in a foreign land.

A final note on political risk: When it results in a loss in a country (for example, currency inconvertibility), it happens to all commercial receivables in that country at once. So, if you have two or more customers in that country each will go into default. That risk is not correlated on domestic sales.

A/R insurance seems to be key for small suppliers amid what some might call a late payments plague, especially in the U.K., but in markets all over, small suppliers are often squeezed into tighter payment terms from their large, corporate buyers.

PYMNTS: What are the strategies that B2B players should take on to reduce the incidence of late payments?

DW: First and foremost, get an idea of who you are dealing with. If you have not met them, then get a credit score or report (Experian, Equifax, etc.). Some of the most common reasons for payment delays by foreign customers are insufficient availability of funds or a buyer may be using outstanding debts/invoices as a form of financing. There’s also complexity of the payment procedure, inefficiencies of the banking system, dispute over quality of product or service provided and even inaccuracies on invoice. Invoices can be sent to the wrong individual, or there can be a dispute over the type of product or service detailed in a contract.

These factors fall into two distinct buckets: influenced by me — and insurance is not a valuable factor (e.g. poorly managed invoice procedures, quality control, etc.) or there are factors not influenced by me — and insurance is a driving factor, such as insolvency, continued delinquency or political risk.