Avalara > Blog > Business > Does Your B2B Ecommerce Business Need a Trade Credit Insurance Policy ?

Does Your B2B Ecommerce Business Need a Trade Credit Insurance Policy ?

  • Sep 17, 2015 | Suzanne Kearns

As an ecommerce business owner who sells to other businesses, you need to do all you can to compete with the big guy. One of the ways to do that is to offer your customers the option of buying your products or services on credit.

But many small business owners resist extending terms because unpaid invoices can wreak financial chaos. But according to James Daly, President and CEO of Euler Hermes North America, "a trade credit insurance policy provides that vital risk management component, while also helping ecommerce companies safely grow sales both domestically and abroad to new and existing customers."   

What Is Trade Credit Insurance?

Trade credit insurance, also known as accounts receivable insurance, allows you to extend credit terms to your customers without the risk of default. The policy covers your accounts receivables when your customers don’t pay their bills due to bankruptcy, insolvencies, cash flow problems, other financial difficulties, bad faith, natural disasters, business closures, change of ownership, and poor economic conditions. In fact, according to Daly, the policies can be tailored to cover nearly every risk.

And that coverage extends to sales tax. Daly says, “a credit insurance policy would cover sales tax on an insured nonpayment in the U.S. because it is not recoverable from the state, federal government or other local municipalities.”

Is this Insurance Really Necessary?

It is, according to Daly. He says the main reason small businesses go out of business is due to nonpayment of a commercial debt. “Accounts receivable can represent up to 40 percent of a company’s assets and yet are most often left uninsured," he says. "And that's why nonpayment can become a serious financial and operational threat, particularly to small businesses." 

How Much Does it Cost?

Trade credit insurance policies are priced according to a multitude of factors, such as your past debt loss, the industry you operate in, your customer base, and your turnover rate. The rate is typically figured as a small percentage of the insured sales. According to Daly, “The rate per thousand is usually just a very small fraction of a penny." He says that for most companies, trade credit insurance pays for itself because of the benefits the business will realize, such as coverage for nonpayments, growth opportunities, released bad debt reserves, and improved bank financing rates. 

What Are the Benefits of Trade Credit Insurance?

If you extend credit to your ecommerce customers, or are considering initiating the practice, there are many benefits to this type of insurance. For instance, you can:

  • Choose which customers to insure. You don’t have to insure all of your accounts receivable, which would only serve to increase the price of your policy. Instead, you can choose to only insure selectively. For instance, if you do business with a major retailer like Walmart or Amazon, you probably don’t need to insure its sales.  
  • Use it as a sales tool. Because you’ll be able to offer credit terms without risk, you can promote the fact that you offer competitive payment terms to appeal to new customers. This should also allow you to enter new markets that you previously deemed as too credit-risky. In addition, because your customers will have the option of buying on credit, they might order product in larger quantities. For instance, if you're an Etsy seller and you expand to selling your handmade products to small retailers, you could receive larger orders if they’re able to buy from you on credit.
  • Gain customer loyalty. The buyers you choose to insure will not be notified that their accounts are covered under your policy. Instead, they will view your decision to extend credit to them as good will, and that may make them more loyal to your business.
  • Be more attractive to lenders. Lenders will view your business more favorably when your accounts receivable are insured, as it strengthens your balance sheet. This may cause them to increase the amount of capital they’re willing to advance you or give you better loan terms.
  • Easily monitor your customers. The insurer will typically monitor the customers you chose to insure and inform you of any changes in their financial health. This will allow you to make better decisions when dealing with them.

If you offer credit to your customers, insuring them with trade credit insurance will help mitigate the risk generally associated with the practice.

Daly says it’s important to remember that “while ecommerce changes the mode by which products are sold, it doesn’t change the risk of nonpayment.”

What about you? If you sell to other businesses, or extend credit to your retail customers, can you use this insurance to grow your business?

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns