In today’s business environment, protecting against credit losses makes strategic sense. However, self-insuring may not be the best approach. Here’s why.
Summary
Key Takeaways
- Self insurance is a cost-effective, but high-risk, way of saving for unexpected business losses.
- It can be an effective risk management technique, covering costs if a customer misses a payment.
- Businesses can choose trade credit insurance over self insurance if they’re lookingto free up cash reserves, whilst avoiding non-payment.
What is self insurance?
Some insurance is mandatory for businesses, such as employers’ liability which covers claims from employees about work-related injuries or illness. However, although recommended, you’re not required by law to protect your finances.
‘Self insurance’ is the term given to the risk management technique a company may take to build up financial reserves to make investments or cover losses – for example, if a customer doesn’t pay (known as ‘bad debt reserves’ in this case) or there is a flood or fire.
You may already self-insure for some costs without even realising it.
With self insurance, if something goes wrong, such as a customer becoming insolvent and entering arrears, you pay the cost out of your own pocket. Therefore, the success of this strategy comes down to the severity and frequency of claims, and size of your cash reserves.
Read more: Credit risk management solutions
Maximising your top and bottom lines
Advantages
Disadvantages
How does self insurance work? And, are there alternatives?
Self insurance requires companies to tie up important sources of capital in large bad-debt reserves, but trade credit insurance doesn’t. With credit insurance in place, companies can deploy their capital where it’s needed most— as working capital that supports growth or through capital investment that spurs innovation.
This makes credit insurance an important alternative to self insurance. It helps businesses avoid catastrophic losses and grow profitability. And it can do so at a lower cost and with less risk than self insurance.
With credit insurance, companies can:
- Confidently grow sales without credit concerns
- Gain guaranteed protection against non-payment or slow payment that can weaken cash flow
- Offer customers faster credit limit extensions
- Gain access to ongoing buyer monitoring that frees up internal credit resources to focus on more strategic initiatives
- Export with safe open terms to buyers around the world
- Leverage secure receivables into better financing options and greater borrowing capacity
Is there a middle ground?
If you’d love access to the insights that a credit insurance provider can offer but aren’t quite ready to commit to cover just yet, you may like to consider our standalone information service Grade Check.
Grade Check is our simple solution to help you protect your business by building a base of trusted, creditworthy customers, suppliers and prospects, using highly accurate and up-to-date information.
It draws on the same database that we use within our trade credit insurance business to determine the coverage for customer policies around the globe. So, if our business is counting on it, yours can too!
You can expect:
- Access to company and financial details.
- Grades for domestic and export businesses with alerts, if these change.
- Monitoring for a 12-month contract period, as standard.
- The ability to self-serve online and request grades individually or in bulk.
- Access through Allianz Trade Online or API.
Ensure a trading network of reliable suppliers and trustworthy customers. Find out more about Grade Check and get in touch.
Making the choice to use trade credit insurance
Whether you choose trade credit insurance, Grade Check, or self-insurance, assessing the costs and benefits of each option will help you determine the best fit for your business.
If trade credit insurance or Grade Check is the right choice for you, we’re here to help. As your trusted partner, we offer tailored solutions that integrate seamlessly into your operations, helping you proactively manage risk. With 62,000 clients worldwide and real-time monitoring of 83 million businesses across 160 countries, we provide actionable insights to keep you ahead.
For award-winning cover and expert guidance, get in touch today.
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Our expertise and commitment
Allianz Trade is the global leader in trade credit insurance and credit management, offering tailored solutions to mitigate the risks associated with bad debt, thereby ensuring the financial stability of businesses. Our products and services help companies with risk management, cash flow management, accounts receivables protection, Surety bonds, Business Fraud Insurance, debt collection processes and e-commerce credit insurance ensuring the financial resilience for our client’s businesses. Our expertise in risk mitigation and finance positions us as trusted advisors, enabling businesses aspiring for global success to expand into international markets with confidence.
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