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Protecting Your Business in Uncertain Times: Trade Credit and D&O Insurance Explained

by FCIS Team | This article was posted on 05 15, 2023 |

Bank on fire

During economic downturns such as the recent ups and downs we have seen in the banking world, businesses may experience cash flow problems and increased credit risk due to non-payment by customers. The lessons gleaned from this collapse offer valuable insights into the best practices that financial institutions (FIs) and other businesses should take into account with regard to their coverage and overall risk management.  We may not know what the future holds (we aren’t psychic), but what we do know is that with the right insurance policies, businesses can protect themselves against risks that arise during difficult economic times.  To ensure our clients are well-positioned to weather the proverbial storm (a literal storm would be covered with a different policy), we recommend one of the following types of insurance policies.

Trade Credit Insurance or Directors and Officers Insurance (D&O)

Wondering which insurance coverage is right for your business? Behold the nutshell versions are outlined below:

Trade Credit Insurance

Trade Credit Insurance comes in handy for contractors, manufacturers, and distributors (anyone with receivables/extending terms). The main benefits of Trade Credit Insurance include:

  • Protecting cash flow: Non-payment by customers can create a cash flow problem for businesses, which can be particularly damaging for small businesses. Trade credit insurance can help to protect cash flow by ensuring that the business gets paid even if a customer fails to pay. In the event that a customer is unable to pay their debts, the trade credit insurance policy can provide the business with financial compensation for the amount owed. This can help the business to avoid defaulting on its own debts.
  • Reducing credit risk: By providing credit limits for customers, trade credit insurance can help businesses to manage their credit risk. This can help businesses to avoid bad debts and minimize their exposure to credit risk. Particularly valuable for businesses facing insolvency or bankruptcy. In the event that a business becomes insolvent, its customers may be more likely to default on their outstanding debts. The trend of increasing bankruptcies in Q1 2023 suggests that credit will likely become even tighter, leading to a possible continuation and exacerbation of financial distress patterns.
  • Enabling sales on credit terms: Many businesses rely on selling on credit terms to generate sales. A benefit of Trade credit insurance is that it can provide peace of mind to business owners and enable them to offer credit terms to customers without worrying about non-payment.
  • Enhancing borrowing capacity: Having trade credit insurance can also enhance a business's borrowing capacity, as it provides additional security to lenders.

Directors and Officers Insurance

Directors and Officers Insurance (D&O) is geared towards protecting the directors and officers of a company; highlights are:

  • Protecting personal assets: D&O insurance can provide personal asset protection for directors and officers of a company in the event of a lawsuit or claim against them. This can be particularly important during economic downturns when businesses may be facing financial challenges and may need to make difficult decisions that could expose them to legal action.
  • Attracting talent: Offering D&O insurance can help to attract and retain talented directors and officers, as it provides them with a level of protection against legal action.
  • Reducing financial risk: By providing coverage for legal costs and damages in the event of a lawsuit or claim, D&O insurance can help to reduce the financial risk for the business and its directors and officers.
  • Enhancing credibility: Having D&O insurance can enhance the credibility of a business and demonstrate to stakeholders that the business takes its responsibilities seriously and is committed to protecting its directors and officers.
  • Facilitating decision-making: D&O insurance can provide directors and officers with peace of mind and enable them to make informed decisions without worrying about personal financial risk.

Get Experienced Help with Your Insurance Policy

Over the next few weeks and months, reinsurers may start exhibiting hesitancy in assuming books that contain banking exposure, which could impact the limits and capacity of primary carriers.  Established insurers may withdraw from the banking sector, and new insurers may step in to take their place. As with all coverages, understanding the specific needs and risks of a business is essential for your insurance professional to determine the types and levels of insurance coverage that are appropriate for your business to provide the best protection against credit risk and safeguard its cash flow. What now? Give us a call - we’re really good at what we do.