Account receivable financing has been a longstanding and important way businesses shrink the debt on their balance sheet and expand their operational capacity. By enabling businesses to receive early payment on their outstanding invoices from a buyer/customer this financing method can also decrease the number of days of sales outstanding and free up additional capital to be used to expand the business.
However, the financing solution often offered by banks has been criticized in the past for being inflexible when it comes to supporting customers of a business with weaker credit. For some banks the risk of non-payment is a major issue when determining whether to purchase certain receivables from their clients. One solution that could ease the friction between banks and clients is trade credit insurance.
Used for ensuring the certainty of payment for a company's goods, trade credit insurance is increasingly being sought after by banks as a way of reducing the risk of onboarding buyers of their client's products and services to a particular account receivables programme. For instance, under a trade credit insurance backed programme, banks have an additional layer of due diligence on a particular customer's credit.
For banks the key to ensuring the acceptability of a significant portion of their customer's buyers rests in their ability to arrange a number of insurance policy arrangements with a number of companies. In Asia there are several international and local companies ranging from Allianz, who oversee Euler Hermes, to Seoul-based K-Sure, operations which all have experience in insuring the risk of potential buyers.
Aside from being able to onboard previously rejected buyers, a trade credit insured account receivables programme can also speed up the process for accepting receivables since risk departments are swayed by the knowledge that the bank is only purchasing the insured receivables.
The faster decision-making process is much appreciated by a bank, which is often pressured by its client to evaluate the creditworthiness of a large set of buyers. Ultimately, an improvement in the process of setting up and executing an account receivables programme can result in an increase of the programme limit.