HOW WILL YOU MAKE PROFIT IF YOUR BIGGEST CUSTOMER FAILS TO PAY?

Just being successful in business does not only mean carrying out deals successfully. Part of running a successful business also involves aiming the most profitable customers, then doing everything possible to keep them loyal and happy. This strategy looks interesting and can keep your business up and running if you are able to attract a high number of lucrative customers. But, it comes with its own share of challenges too and it can soon lead to the risk of non-payment.

Moreover, if you are a scarf manufacturer for instance and your bulk of business depends on international buyers, then given the seasonal nature of your business it is easy for your lucrative customers to delay payments. Relying on them for the bulk of your revenue, which is laced with uncertainty can introduce concentration risk.

How to deal with this situation?

Concentration risk will affect you if when doing business you rely heavily on that one key customer that a single payment failure or delay, would significantly burden the business. The damage to revenue and cash flow is bound to create instability for the organisation, which could make you unable to pay for operating costs including meeting debt obligations and paying staff and suppliers.

Trade credit insurance is the right way to deal with such situations and avoid financial risk. When you insure your company for clients that are likely to delay payments or for the ones you are doubtful of, you can easily claim your insured money to take care of cash flow, in case of non-payment of trade-related debts or regular payments. Credit insurance policy covers you from commercial risks, arising from defaults or delays.

How can companies mitigate losses?

Without being highly dependent on just one client or a few clients and their payments, every company can adapt to a different approach to keep losses at bay. Here’s what CFOs can pay attention to:

• Bring in a long-term contract with each client to reduce the risk of the customer switching suppliers unpredictably.
• Hire and build-in resources to grow the customer base beyond the existing one, preferably in different countries and localities, to expand the horizon.
• Innovate on the product range to be able attract a different customer base as well as gain greater share of business with existing customers.
• Be alert about the customer’s payment habits and count in trends or environmental factors to stay on guard about late or non-payments.
• Set payment terms keeping in mind your business and offer incentives to the customer to stick to their usual payment cycle, this will reduce the risk of late payments.
• ? Offer a shorter payment cycle or break the same into parts, so that you always have payments flowing in to cover the costs of business overheads and have a capital to fall back on in case of emergency.

Apart from putting these strategies to place, you can always take out trade credit insurance coverage to protect the business’s cash flow in the event of late or non-payment. This can also favourably influence lenders’ decisions regarding whether to offer finance and at what rates.

What can you expect from a trade credit insurance policy?

The premium for trade credit insurance in India depends on your company’s yearly turnover and credit risk of yours clients and buyers. So, when you decide to buy the right credit policy for your company, you will have to specifically access your trade dealings and buyer profile to arrive at a perfect figure.

What all is covered within the trade credit insurance policy?

• If you own the policy, you can be able to defense your business against the risk of non-payment if a buyer becomes bankrupt or insolvent.
• If your buyers fail to pay within the defined period of time then you will get coverage for Protracted Default.
• You can get security for exports coverage, the policyholder gets an option to provide coverage for political risks that covers non- payment due to Moratorium, Inconvertibility, War, Import/ Export Restriction, Natural Disaster, License Cancellation etc.
• Trade Credit insurance policy covers your complete turnover with predetermined limits.

Akshar is a trade credit insurance claims expert. We pay special attention to the market and study the pulse of your clients to know who can pose a risk and accordingly plan the right trade credit insurance policy for you. Added to this, our history and path record will tell you that we have handled the toughest of claims without letting our clients blink an eye.

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