Why you should be looking at getting Trade Credit?
First off you should note that Trade Credit Insurance should not be confused with factoring as they are not one in the same products. This is a common mistake that businesses make when they are approached about Trade Credit. For clarity we have listed below the difference between the two products.
Factoring is a finance product that pays you for your accounts receivable by you selling them to a third party called a factoring company with the factoring company taking a cut in exchange for you having the money then and there. This helps with your cash flow by ensuring that you are getting paid promptly however the money is at risk should the account receivable you have sold not pay his invoice to the factoring company who at that point can claw back any money that they have paid you.
Trade Credit on the other hand works by insuring all or part of your accounts receivable against insolvency of individual customers, so basically it works by insuring against the failure of a company to pay for goods or services provided by you to them on credit terms, this applies to both the domestic markets here in New Zealand and also the overseas export markets.
A good example of where Trade Credit would have been used here on New Zealand are the recent increase of companies going into receivership such as The BBQ Factory or Whitcoulls.
In the case of Whitcoulls many of the creditors were never paid, as liabilities such as bad debts were not part of the sale of the business. So this left creditors out of pocket for large amounts of money that where owed by the REDgroupRetail Group who where the owners of Whitcoulls.
If you are looking at getting Trade Credit then you need to fall into one of the following
- Be an Exporter, Importer, Distributor or Manufacturer
- Sell a Product or Service
- Offer payment terms on goods and services you sell
- Trade on an open account and not always trade under a letter of credit
If you fall into the above then you are a business that would be considered ideal for Trade Credit and it is important to note that banks will potentially view you in a more favourable light if you need to borrow more.
There are both Short Term and Long Term Benefits of Trade Credit as listed below
Short Term
- Quick replacement of working capital in the event of a claim
- Cash flow protection
- Credit Managment Assitance
Long Term
- Bad Debt Reduction
- Potential to borrow more from the bank
- Grow into new markets with confidence.
In my professional opinion I would advise anyone that is involved in the Exporter, Importer, Distributor or Manufacturer industries to take a serious look at getting a Trade Credit policy in place in the current economic climate.
