Enhancing Security on Client Working Capital Loans
In much the same way mortgage insurance is designed to protect banks in the event of a foreclosure, receivables insurance enhances security on client working capital loans – in the event that a client’s buyers – domestic or foreign – are unable to fulfill their invoice payment obligations. Such unforeseen cash flow disruptions can be caused by a buyer’s insolvency, protracted default (failure to meet obligations due to inadequate cash flow), or political disruptions that lead to a loss on foreign receivables.
Because account receivables typically comprise up to 40% of a Canadian company’s total assets – often dominating the balance sheet – the under-insured state of this important collateral introduces undue risk on working capital loans for bankers. In addition the lack of insurance can restrict the amount that can be loaned, and also force higher interest rates on business clients – artificially restricting sales growth by limiting the cash that could be available through asset leverage, cash that would accelerate sales growth. Receivables insurance provides comfort that a company’s accounts receivable, which are a key component of the collateral security taken for working capital loans, are protected.
Less than 10,000 companies among the country’s 1.1 million employer businesses currently employ receivables insurance products. This is in part due to the misunderstanding among CEOs, CFOs, shareholders, Credit Managers and Enterprise Risk Managers that receivables insurance can only be used to protect export sales. This is untrue, and in an uncertain economic climate that is prone to unforeseen events, unwise as well. Bankers who understand the benefits and potential of receivables insurance can provide valuable guidance to their business clients, helping them protect their largest asset and grow their enterprises.