M&A Advisory

How Portfolio Companies Can Use Trade Credit to Insure Accounts Receivable

Portfolio company CFOs can recall the fear and uncertainty they experienced when the recession hit.  Unprecedented market dynamics caused new concerns to emerge as they determined how the financial downturn would affect their company.

Some of their concerns included whether their banking partners were on solid footing:

  • Would they change their lending practices?

  • Could they call their note?

  • Was their line of credit safe?

  • What options were there if any of these things changed?

The biggest shared concern across geographies and industries was liquidity, which in part comes from accounts receivable.

What would happen if customers couldn’t pay in a timely manner, or at all?

For private equity firms who own multiple portfolio companies, these concerns were obviously multiplied exponentially.

How Trade Credit Insurance Works

TCI can include a component of political risk for export businesses to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation, and more. The premium rate is a function of exposure, loss experience, terms of sale and credit risk of the insured portfolio. In addition, TCI can also cover single transactions or trade with only one buyer.

The benefits of purchasing TCI now are twofold:

  1. Credit insurance protects both the insured seller of goods and services as well as their lenders. It protects profit margins, balance sheet and stable cash flow from A/R exposure in the event of a crisis, and

  2. TCI provides executives with a useful benchmark for the valuation of a company’s risk.

The role credit insurance policies play in helping portfolio company CFOs (and by extension, private equity executives) understand the A/R risks they face may not be typically considered when purchasing insurance.

Policies can be placed across an entire private equity portfolio in aggregate or placed individually as standalone policies at each portfolio company. The evaluation of these policies provides invaluable information from a third-party about the risk portfolio companies face. Placing it at the fund level allows private equity executives to know the current value of the risk of all portfolio companies in real time, helping them stay up-to-date on purchasing decisions and the climate of the financial market in general.

The financial crisis was a real wake up call for many private equity firms when it came to trade credit insurance. Economic uncertainties are a fact, and recent signs of a slowdown domestically and abroad suggest that prudent, forward thinking risk managers investigate the terms and coverage afforded by TCI.  There is a competitive and robust market of insurers ready to review your exposure and provide a simple and informative analysis.

For more information on credit insurance policies, contact Newfront today.

Josh Warren
The Author
Josh Warren

Senior Vice President

Josh is a Senior Vice President and M&A Advisory Practice Leader of Newfront Insurance and Financial Services. His responsibilities include operational leadership, client management, program design, and risk analysis for alternative asset managers and Newfront clients facing a merger or acquisition.

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