The Ultimate Guide to AR & Credit Insurance: Is It Worth the Investment?

In the dynamic world of B2B transactions, managing financial risk is crucial to ensuring sustainable growth. One area that often gets overlooked until disaster strikes is the exposure embedded in outstanding receivables. When a customer defaults or declares bankruptcy, your company might be left scrambling to recover payment, if recovery is even possible.

That’s where accounts receivable insurance (also known as credit insurance) comes into play. It offers a safety net, protecting your business from potential losses tied to unpaid receivables. But is it truly worth the investment? This guide explores every facet of insurance for accounts receivable, from benefits and drawbacks to cost analysis and how to get started.

Why the Decision to Insure Accounts Receivable Matters

Accounts receivable typically make up a substantial portion of a business’s current assets. These unpaid receivables are essentially short-term loans your company has issued to customers. While trade credit can help build relationships and drive sales, it also introduces considerable risk.

If a major customer becomes insolvent or simply refuses to pay, the hit to your cash flow can be devastating, especially for small to mid-sized companies. Accounts receivable insurance coverage provides a financial buffer, helping you recover a portion (or all) of the receivable depending on the policy terms.

According to a recent NACM article titled To Insure or Not to Insure—That is the Question, companies are increasingly turning to AR insurance as geopolitical and economic instability continues to impact customer reliability worldwide.

Reasons to Insure Accounts Receivable

So, why should you consider insuring your AR? Here are the key reasons:

1. Protection Against Customer Insolvency

This is the primary use case. If a customer declares bankruptcy, your insurance policy can help you recoup lost revenue. This protection is particularly useful when dealing with international customers or new business relationships where credit histories might be less transparent.

2. Improved Cash Flow Stability

Unpaid receivables can create major cash flow problems, especially if you operate with tight margins or long payment cycles. By adding insurance, you introduce a level of predictability and peace of mind to your receivables.

3. Increased Borrowing Capacity

Banks and other lenders often view insured receivables more favorably. You may be able to access better financing terms or increase your credit lines since the insurer guarantees part of the receivable.

4. Enhanced Risk Management

Many accounts receivable insurance providers offer credit risk evaluation services. These services can improve your ability to assess potential clients and monitor existing ones, thereby reducing bad debt before it occurs.

5. Supports Global Expansion

Selling to international customers introduces layers of risk including political, currency, and economic instability. Credit insurance helps mitigate these risks, allowing you to grow into new markets confidently.

Arguments Against Insuring Accounts Receivable

While the advantages are significant, insurance for accounts receivable isn’t universally necessary. Here are some of the reasons companies choose not to purchase coverage:

1. Premium Expense

Perhaps the most cited concern, premiums can range between 0.1% to 1% of your covered receivables. For companies with historically low bad debt, this could seem like an unnecessary cost.

2. False Sense of Security

Insuring your AR might lead some companies to ease up on internal credit controls or due diligence. It’s crucial to remember that insurance supplements, not replaces, sound credit practices.

3. Complex Claims Process

Depending on your provider, navigating the claims process can be time-consuming and bureaucratic. If the process takes too long, your cash flow problems may persist even after you’re reimbursed.

4. Selective Coverage

Most policies don’t cover all customers or receivable types. For instance, receivables overdue by more than a certain number of days may be excluded. Businesses need to understand exactly what is and isn’t covered.

5. Administrative Overhead

Managing a policy, including reporting, documentation, and communication with the insurer, can introduce new administrative tasks that need resources and attention.

Accounts Receivable Insurance Cost: Is It Worth the Premium Expense?

Determining whether the accounts receivable insurance cost justifies the investment is not a one-size-fits-all decision. It depends on your industry, customer base, payment terms, and risk tolerance.

Here are some important cost considerations:

1. Premium Rates

As noted, typical premiums range from 0.1% to 1% of the insured amount. The final rate depends on your industry risk profile, customer concentration, historical loss data, and geographical exposure.

2. Deductibles and Limits

Just like any insurance product, you’ll face deductibles and possibly limits per buyer or per policy period. A low premium might come with a high deductible or limited scope.

3. Indirect Benefits

Besides financial reimbursement, AR insurance offers secondary value. These include better borrowing options, stronger credit risk insights, and improved customer screening, all of which can translate into financial gains.

4. Comparing With Potential Losses

Estimate your historical bad debt losses and assess how AR insurance would have mitigated those losses. If insurance could have prevented major financial damage in the past, that’s a strong argument in its favor. 

The key question is this: Can your business afford a major customer default without severe repercussions? If the answer is no, the cost may very well be worth it.

How to Get Started With Accounts Receivable Insurance

If you’re considering credit insurance, here’s how to take the first step:

1. Assess Your Exposure

Begin by reviewing your accounts receivable portfolio. Identify your largest customers, payment histories, and concentration risks. Also, check your aging reports, these will highlight your vulnerable receivables.

To streamline your review, consider adopting accounts receivable automation tools. Automation platforms like Gaviti help you visualize receivable risks in real time and maintain better control over collections.

2. Research Providers

Leading providers of AR insurance include Euler Hermes, Atradius, Coface, and QBE. Each provider offers varying degrees of coverage, reporting tools, and credit risk services. Compare policy terms carefully.

3. Get Quotes

Work with a specialized broker to obtain quotes. Be prepared to share detailed financial and customer information. A broker can also help interpret policy language and structure a policy aligned with your needs.

4. Negotiate Terms

Don’t be afraid to negotiate. You may be able to customize your policy by selecting key customers to insure, opting for a higher deductible, or bundling with other risk management products.

5. Integrate With AR Processes

After securing coverage, train your AR and finance teams to work in sync with the insurer’s requirements. This might include periodic reporting or flagging specific customer behavior.

Be sure to revisit your AR workflows. For instance, reviewing invoice processing best practices can help you establish cleaner documentation and more efficient receivable processing, reducing risk and speeding up potential claims.

How Gaviti Can Help Companies Comply with A/R Insurance Requirements

Accounts receivable insurance providers often require companies to meet strict documentation, reporting, and follow-up standards in order to maintain coverage eligibility and facilitate smooth claims processing. Gaviti’s platform is designed to align seamlessly with these demands. Through automated workflows, Gaviti ensures that follow-ups, dunning communications, and escalation procedures are executed consistently and documented thoroughly, creating a comprehensive audit trail that proves your company is proactively managing receivables.

This level of transparency and process rigor can also play a strategic role during policy negotiations. Insurers are more likely to offer favorable terms or reduced premiums to companies that demonstrate strong internal controls over receivables management. By leveraging Gaviti, businesses not only improve their collection outcomes but also show insurers that they are lower-risk policyholders. In this way, Gaviti doesn’t just support compliance, it becomes a value-added asset in your broader credit risk strategy.

See why Gaviti is ranked as the #1 Credit & Collections Software on G2: