Trade credit risk management

When businesses extend trade credit to buyers, they are essentially taking a risk by allowing their buyers to buy now and pay later. Trade credit risk may arise due to the following types of losses:

• Buyer insolvency

• Non – payment

• Political risks – especially true for overseas markets due to export policies and restrictions, currency rates etc.

Businesses therefore need to examine, understand and make adequate provisions to ensure that risk due to the above mentioned factors is minimised. A well defined trade credit risk management policy will help in:

• Improved credit management

• Enhanced confidence to sell in broader markets

Several risk management groups offer specialised services to help businesses define effective strategies for managing trade credit risks. Businesses may also consider hiring expert consultants for the same.

Credit Insurance

Amongst the more popular ways of managing trade credit risks is credit insurance. Credit insurance refers to an insurance policy that can potentially safeguard companies against bad debt. Companies may find credit insurance beneficial in a number of ways such as:

• Credit Risk Protection: Protects companies from the effects of bad debts.

• Enhanced Sales: With credit insurance, businesses can confidently enter into trade credit arrangements with more buyers, thus in turn, boosting sales revenues.

• Better chances of bank financing: Businesses that have an insurance cover to protect their account receivables have better chances of securing finance from banks through increased borrowing capacity.