Selling on credit is risky – customers might pay late or not at all. Businesses manage this risk through trade credit insurance or self-insurance. Here’s a quick breakdown:
- Trade Credit Insurance: Protects up to 90% of unpaid invoices, costs less than 0.5% of revenue, and includes debt recovery services. It’s ideal for businesses seeking financial stability, market expansion, and better financing terms.
- Self-Insurance: Involves setting aside funds for bad debts. It offers control but ties up capital, increases administrative work, and exposes businesses to major losses during downturns.
Quick Comparison
| Factor | Trade Credit Insurance | Self-Insurance |
|---|---|---|
| Cost | Premiums (0.2%–0.5% of revenue) | Internal reserves (non-deductible) |
| Risk Coverage | Up to 90% of unpaid invoices | 100% of losses absorbed internally |
| Cash Flow Impact | Frees up capital | Reserves limit growth opportunities |
| Debt Recovery | Included in policy | Handled internally or outsourced |
| Economic Downturns | Protection against insolvencies | High risk of financial strain |
| Administrative Work | Minimal | Significant |
Key Takeaway: Trade credit insurance offers broader protection and less risk, while self-insurance requires more resources and exposes businesses to greater financial uncertainty. Choose based on your business size, goals, and risk tolerance.
What is credit insurance and how does it work? | Atradius
Trade Credit Insurance vs Self-Insurance: Basic Definitions
Grasping the distinction between trade credit insurance and self-insurance is key to effectively managing credit risk. These two approaches reflect fundamentally different strategies for protecting your business from potential credit losses.
What Is Trade Credit Insurance?
Trade credit insurance is a tailored risk management tool designed to shield businesses from financial losses when customers fail to pay their invoices. Instead of leaving your company exposed to the uncertainty of payment defaults, this insurance acts as a safeguard, covering a significant portion of unpaid invoices.
"Trade Credit Insurance is a credit risk management solution that safeguards the development of your business, in particular by protecting you against losses due to non-payment of invoices." – Coface
This type of insurance involves setting credit limits for buyers, with the insurer providing services like business information, debt collection, and compensation for losses. Insurers analyze the creditworthiness of each customer and assign appropriate credit limits. If a covered customer defaults due to insolvency, bankruptcy, or extended payment delays, the insurer reimburses a pre-agreed percentage of the unpaid invoice.
Trade credit insurance also covers risks like prolonged payment defaults, insolvency-related bad debts, and political disruptions in international trade. This makes it especially valuable for businesses involved in cross-border transactions, where political instability could jeopardize payments.
Premium rates are based on the average credit risk across your insured portfolio of buyers. For many businesses, premiums start at around $3,500 and often account for less than 0.5% of annual revenue. The scale of its use in the United States highlights its importance: in 2020 alone, trade credit insurance supported at least $600 billion in annual sales. However, the market also faced challenges, with $50 billion in sales lost due to the unavailability of coverage.
What Is Self-Insurance?
Self-insurance, on the other hand, involves setting aside internal funds to cover potential losses. Instead of relying on a third-party insurer, businesses establish reserves specifically to manage bad debts and customer defaults.
In this model, companies assess potential risks and allocate funds to cover losses as they arise. When a customer defaults, the business absorbs the loss using its internal reserves, which are calculated based on historical data, industry benchmarks, and anticipated claims. To prevent catastrophic losses, businesses typically set limits for individual incidents and total annual losses.
Unlike traditional insurance, self-insurance eliminates the need for regular premium payments to an external provider. Instead, the company retains full control over its funds and risk management processes. However, self-insurance is more than just setting aside money – it requires a thorough risk assessment, strong mitigation strategies, and efficient claims management systems. Many companies either build an internal team or hire a third-party administrator (TPA) to handle claims.
Financial stability is critical for self-insurance. Businesses must ensure they can cover potential losses while complying with legal requirements, which may include providing bonds or letters of credit to guarantee claim payments, especially in programs like workers’ compensation.
While self-insurance can offer greater control and may reduce costs over time, it ties up capital that could otherwise be used for growth, equipment purchases, or other investments. This trade-off makes it a viable option only for companies with sufficient financial resources and risk management expertise.
Trade Credit Insurance: Benefits and Drawbacks
This discussion dives into the pros and cons of trade credit insurance, a key tool in managing business risks. By understanding its advantages and limitations, companies can make smarter decisions about safeguarding their operations. While trade credit insurance offers a solid layer of protection, it’s important to balance the benefits with the associated costs and restrictions.
Benefits of Trade Credit Insurance
Financial Protection and Stability
Trade credit insurance acts as a safety net when customers fail to pay their invoices. In cases of nonpayment, businesses can recover up to 90% of the invoice value, significantly lessening the blow of defaults. This is particularly important since customer defaults or insolvencies account for roughly 25% of corporate bankruptcies.
The coverage extends beyond nonpayment to include losses from bankruptcies, prolonged defaults, and even political disruptions affecting international trade. With U.S. business insolvencies recently hitting high levels, this type of protection has become increasingly critical for maintaining steady cash flow and supporting growth.
Confidence in Market Expansion
With trade credit insurance, businesses can confidently explore new markets and take on larger contracts. David Edgell, Regional Commercial Manager at Allianz Trade, highlights this benefit:
"Trade credit insurance allows you to take on additional work safely and securely, whether it’s a new customer or expansion from existing customers."
This added security encourages businesses to extend credit terms and pursue opportunities without the fear of significant financial setbacks from unfamiliar clients.
Improved Use of Capital
By reducing the need to hold large reserves for potential bad debts, trade credit insurance frees up working capital. This allows businesses to channel funds into growth initiatives, equipment upgrades, or other strategic investments. For companies focused on expansion, this can be a game-changer.
Better Terms from Lenders
Banks and financial institutions often view trade credit insurance as a positive sign of proactive risk management. This can strengthen a company’s financial profile, leading to more favorable loan terms and credit facilities.
Additional Services
Many trade credit insurance policies come with perks like professional debt collection services and detailed credit assessments. These tools help businesses set credit limits more effectively and manage customer relationships.
Affordable Coverage for Broad Protection
The scale of trade credit insurance adoption speaks volumes about its value. In 2021, major insurers protected nearly $400 billion in turnover, and in 2020, 14.52% of global trade was covered by credit insurance. Premiums remain accessible for most businesses, typically costing less than 0.5% of turnover, with rates ranging from 0.05% to 0.6%.
While the benefits are compelling, trade credit insurance does come with some challenges.
Drawbacks of Trade Credit Insurance
Premium Costs and Expense Concerns
Though premiums often start around $3,500 and represent a small percentage of turnover, the cost may not be justifiable for businesses with a strong track record of low bad debt.
Coverage Limitations
Trade credit insurance isn’t a blanket solution. Coverage is often buyer-specific, and insurers may reject high-risk customers entirely. Policies also come with deductibles, meaning businesses typically recover only 75% to 95% of the owed amount, leaving them responsible for the rest.
Complex Claims Process
Filing claims can be a lengthy and paperwork-heavy process, which might disrupt cash flow. There’s also no guarantee of payout, as claims undergo detailed investigations that can strain customer relationships.
Reduced Control and Flexibility
Businesses may need to follow the insurer’s credit policies, which might not align with their own strategies. Since insurers prioritize their overall loss ratios, their decisions may not always support a company’s individual goals. This could create friction when aligning credit risk management with broader business strategies.
Operational Challenges
Insurers often require detailed financial statements, which can be a hurdle for private companies with limited documentation. Additionally, manual processing can slow down approvals, and the criteria used to set credit limits are not always transparent, further restricting flexibility.
Despite these challenges, trade credit insurance remains a valuable tool for many businesses. As Atradius notes:
"It will come as no surprise to learn that we at Atradius don’t believe there are any disadvantages to a trade credit insurance policy. That is not to say we don’t recognise there are limitations."
The key is evaluating whether the benefits align with your company’s specific risk profile and growth ambitions. Balancing the costs and constraints with the protection it offers is essential for making the right decision.
Self-Insurance: Benefits and Drawbacks
Self-insurance offers a unique way for businesses to handle credit risks by relying on their own reserves to cover potential losses, rather than purchasing external insurance. This approach reflects growing confidence in internal risk management, but it’s not without its complexities. Let’s break down the key advantages and challenges of self-insurance to see what this strategy entails.
Benefits of Self-Insurance
Cutting Out Premium Costs
One of the biggest perks of self-insurance is eliminating the need for premium payments to an external insurer. As experts note, “Primarily, a company retains exposure to otherwise insurable risk because it believes it can reduce its cost of insurance and/or obtain cash flow advantages”. By sidestepping premiums, businesses save on administrative fees, profit margins, and other added costs typically built into insurance plans.
Better Cash Flow Control
Self-insurance changes the way companies manage their cash. Instead of paying premiums upfront, funds are only used when claims arise. This flexibility allows businesses to keep more cash on hand, which can be redirected toward operations or strategic investments as needed.
Keeping Capital in the Business
When companies self-insure, they retain funds that would otherwise go to an insurer. If claims are lower than expected, these reserves can be reinvested into growth opportunities, new equipment, or other priorities. This approach provides businesses with more control over their financial resources.
Greater Awareness of Risks
Taking full responsibility for potential losses often leads businesses to adopt stronger risk management practices. This includes better credit assessments, stricter customer evaluations, and more disciplined collection processes. By being directly accountable, companies develop a sharper focus on minimizing risks.
Scalability for Larger Businesses
Larger organizations, with more resources at their disposal, are often better equipped to handle the demands of self-insurance. They can allocate teams and funds to manage risks across various aspects of their operations effectively.
While these benefits are compelling, self-insurance also comes with its own set of challenges.
Drawbacks of Self-Insurance
Risk of Major Losses
One of the biggest downsides of self-insurance is the exposure to large, unexpected losses. A major customer bankruptcy or an economic downturn could severely impact cash flow or even threaten the business’s survival. As Nigel Birney, Head of Trade Credit UK & Ireland at Lockton, puts it, “The truth is self-insurance is essentially the same as having no protection at all. You’re taking uncalculated risks, with no guarantee that your company will be shielded from financial loss”.
Challenges in Managing Reserves
Figuring out how much money to set aside for potential claims is no small task. Businesses must carefully analyze their risk profiles and maintain disciplined reserve management practices. This requires a level of precision and oversight that goes far beyond simply paying regular insurance premiums.
Increased Administrative Demands
Self-insurance isn’t just about setting money aside – it also involves significant administrative work. Companies must handle tasks like analyzing partners’ financial data, setting credit limits, collecting overdue invoices, and even managing legal disputes. These responsibilities require dedicated expertise, which can be a heavy burden for businesses without the necessary resources.
No External Recovery Support
Unlike trade credit insurance, which often includes professional collection services and access to global recovery networks, self-insured businesses are on their own when it comes to recovering unpaid debts. This can lead to longer collection times and lower recovery rates.
Strain During Economic Downturns
Economic challenges can hit self-insured businesses hard. For example, trade credit insurance payouts rose by 23% in the first half of 2023 compared to the same period in 2022, reflecting how unpredictable payment patterns can become during tough times. Self-insured companies must absorb these losses entirely on their own.
Overly Cautious Credit Policies
The fear of significant losses may push self-insured businesses to adopt overly conservative credit strategies. This could mean avoiding potentially profitable opportunities or markets due to perceived risks, ultimately limiting revenue growth.
While self-insurance offers the potential for cost savings and better cash flow management, it’s clear that the approach comes with serious risks. As experts point out, “self-insurance can be a powerful tool for reducing insurance costs and increasing cashflow, but it comes with risks that should be carefully evaluated”. For businesses considering this route, a thorough assessment of their risk tolerance and resource availability is essential.
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Direct Comparison: Trade Credit Insurance vs Self-Insurance
Here’s a breakdown comparing trade credit insurance with self-insurance. When evaluating, it’s important to look beyond premiums and factor in cash flow, tax implications, and opportunity costs.
Cost Analysis
| Cost Factor | Trade Credit Insurance | Self-Insurance |
|---|---|---|
| Upfront Costs | Premiums (around 0.2% of gross monthly sales) | Funds tied up in bad-debt reserves |
| Tax Treatment | Premiums are tax deductible | Bad debt reserves are not tax deductible |
| Cash Flow Impact | Predictable premiums; capital stays available for use | Reserves reduce available cash flow for operations |
| Recovery Costs | Included in the premium | Extra costs for internal or external collections |
| Opportunity Cost | Capital remains free for growth and investments | Locked reserves limit expansion opportunities |
Currently, trade credit insurance is about 30% less expensive than self-insurance. On top of that, self-insurance can demand more resources – both financial and human. To offset potential losses, businesses relying on self-insurance often need substantial revenue growth. Tax treatment also creates a notable divide: trade credit insurance premiums are tax deductible, while bad debt reserves are not.
Next, let’s examine how these strategies handle risk coverage and claims recovery.
Risk Coverage and Claims Recovery
While cost is a major factor, effective risk coverage is equally crucial. The two approaches differ significantly in how they mitigate risks and manage claims.
Coverage Scope and Limits
Trade credit insurance typically covers up to 90% of unpaid invoices and includes professional debt recovery services. In contrast, self-insurance leaves businesses to bear 100% of the financial burden, often adding extra collection costs. This can be especially dangerous during economic downturns. For example, insurance payouts to businesses with unpaid invoices rose by 23% in the first half of 2023 compared to the same period in 2022.
Recovery Mechanisms and Efficiency
With trade credit insurance, professional debt collection services are part of the package, improving recovery rates. Self-insured companies, however, must either manage collections in-house or hire external agencies, which adds to costs. The challenges of going it alone are evident: in Q2 2023, The Insolvency Service reported a 13% rise in company insolvencies in England and Wales compared to the same period in 2022.
International vs. Domestic Risk Management
For businesses operating across borders, trade credit insurance provides an edge. It addresses risks like political instability, currency fluctuations, and foreign legal complexities – factors that can make international debt recovery a nightmare. Self-insured companies often struggle in these scenarios, with limited options when dealing with customers in jurisdictions with different laws or political uncertainties. This highlights the importance of aligning risk strategies with the geographic reach of your business.
Deciding between trade credit insurance and self-insurance requires a thorough evaluation of costs, risks, and operational needs to find the best fit for your business.
Business Growth and Expansion Considerations
When businesses aim to grow or enter new markets, how they manage credit risk becomes a crucial factor in their success. Choosing between trade credit insurance and self-insurance can either smooth the path to expansion or create significant hurdles. Let’s explore how these strategies impact growth.
How Trade Credit Insurance Supports Growth
Trade credit insurance plays a key role in reducing financial uncertainty, which often holds businesses back from pursuing new opportunities. By covering up to 95% of unpaid debts, this insurance provides companies with the confidence to extend credit to new customers and explore unfamiliar markets.
This sense of financial security also enhances cash flow, which is essential for strategic planning and budgeting. Instead of locking up capital in bad debt reserves, businesses can channel those funds into growth initiatives, product development, or market expansion. This flexibility is especially valuable in today’s challenging economic climate, where default rates are on the rise.
Consider this example: A U.S.-based chemicals company with an $18 million turnover was approached by a South American client wanting to increase orders from nearly zero to $7 million annually on open credit terms. With the backing of trade credit insurance, the company confidently accepted the deal, boosting its turnover by almost 40%.
"Trade credit insurance allows you to take on additional work safely and securely, whether it’s a new customer or expansion from existing customers", says David Edgell, Regional Commercial Manager at Allianz Trade.
International expansion becomes far less daunting with trade credit insurance. It mitigates risks like political instability, currency fluctuations, and differing legal systems, removing the need for overseas customers to secure letters of credit and simplifying cross-border transactions.
Additionally, businesses using trade credit insurance often gain credibility with financial institutions. Banks view these companies as more stable and are more likely to offer favorable lending terms. This improved access to capital creates further opportunities for strategic investments and growth.
Specialized providers, such as Accounts Receivable Insurance, offer customized policies tailored to specific business needs. These providers not only deliver tailored coverage for domestic and international markets but also offer risk assessment services and access to a global network of credit insurance carriers. This support helps businesses navigate the complexities of expansion while maintaining strong protection.
While trade credit insurance offers a clear path to growth, self-insurance often presents challenges that can hinder expansion.
Self-Insurance Growth Challenges
Unlike the growth benefits of trade credit insurance, self-insurance often creates obstacles that limit a company’s ability to scale. The most immediate challenge lies in capital allocation. Businesses must set aside significant reserves for bad debts, which reduces the cash available for investments in growth, new products, or market entry.
As companies grow, the risks of unpaid invoices increase, making self-insurance even more complex. Businesses must constantly reassess and increase their reserves to maintain adequate coverage, creating a cycle where growth becomes both costly and risky.
Managing credit risk internally also requires substantial resources. Companies need to conduct their own credit assessments, monitor customer payment behaviors, and handle debt collection. These tasks demand specialized expertise and can strain resources, particularly for businesses expanding into new or international markets.
Another major drawback of self-insurance is the lack of robust market intelligence. Without expert credit analysis, businesses may either take overly cautious credit decisions that limit growth or extend credit too freely, leading to significant losses.
Self-insurance also demands a level of financial stability that many growing businesses simply don’t have. Companies struggling with cash flow or payroll are especially ill-suited for this approach. This issue is often magnified during expansion phases, when businesses need to allocate resources toward growth initiatives.
International expansion adds another layer of complexity. Without professional guidance, businesses face challenges navigating foreign legal systems, political risks, and currency fluctuations. These factors can lead to missed opportunities or substantial losses.
The current economic climate only heightens these risks. For example, a late payment crisis threatens over 400,000 small firms, and default or insolvency is responsible for 25% of corporate bankruptcies. In such conditions, self-insurance becomes increasingly precarious for companies looking to expand.
Ultimately, self-insurance forces businesses to juggle credit risk management alongside their core growth strategies. This divided focus can result in either poorly managed risks or missed opportunities – or worse, both at the same time.
Compliance and Financial Reporting Requirements
When evaluating risk management strategies like trade credit insurance versus self-insurance, it’s not just about cost and coverage. Compliance and financial reporting requirements are equally critical. These obligations can directly influence your company’s accounting practices, audit processes, and overall financial transparency. Let’s explore how these two approaches differ in their impact on compliance and reporting.
Trade Credit Insurance Compliance Benefits
Trade credit insurance simplifies compliance and financial reporting, creating a smoother process for businesses while boosting credibility with stakeholders. By transferring the risk of non-payment to an insurer, companies gain several advantages in their financial reporting.
One key benefit is improved balance sheet clarity. Trade credit insurance turns potential bad-debt reserves into secured assets, which can make your financial position more transparent. Additionally, the premiums are tax-deductible, which can streamline reporting and provide financial relief. For lenders and investors, this setup offers greater confidence in your company’s financial stability.
From an audit perspective, trade credit insurance reduces complexity. Auditors don’t have to assess detailed reserve calculations or challenge management’s estimates, as the policy provides clear documentation and standardized claims procedures. This can save time and reduce the potential for disputes during audits.
Regulatory compliance is another area where trade credit insurance shines. Policies offered by private insurers or the Export-Import Bank of the United States (EXIM) meet established regulatory standards, ensuring your company has the necessary documentation for compliance reporting.
For businesses operating internationally, trade credit insurance also eases the burden of managing foreign credit risk and political risk assessments. Insurers take on these evaluations, freeing up internal resources for other priorities. Providers like Accounts Receivable Insurance further enhance compliance by offering risk assessment services and access to a global network of credit insurance carriers. This professional support ensures that your coverage aligns with regulatory standards while maintaining clean financial reporting.
In contrast, self-insurance brings with it a host of challenges in both compliance and reporting.
Self-Insurance Reporting Challenges
Self-insurance complicates compliance and financial reporting, often requiring significant resources to manage the associated complexities. Under self-insurance, companies must estimate and record losses for potential claims in line with ASC 450. This process often necessitates hiring professional actuaries to calculate liabilities, adding cost and complexity to financial reporting.
Under US GAAP and GASB guidelines, management must record its best estimate of self-insurance claim liabilities without factoring in a margin for adverse outcomes. This creates additional pressure to ensure the accuracy of these estimates, as any discrepancies can materially impact financial results.
Audits become more intricate with self-insurance. Auditors need to evaluate the reasonableness of loss estimates, review the methodologies behind reserve calculations, and assess whether internal controls adequately support these estimates. Companies must also track changes in projected losses between accounting periods, which often demands dedicated resources and sophisticated tracking systems.
Using a third-party administrator (TPA) to handle claims can introduce further challenges. If the TPA changes, it may disrupt estimation processes, potentially leading to biased or inconsistent calculations. Strong internal controls are critical to ensure that methodologies and assumptions remain accurate.
Tax implications add another layer of complexity. Unlike trade credit insurance premiums, bad debt reserves under self-insurance are not tax-deductible until the losses are realized. This requires careful tracking of timing differences and potential tax adjustments, increasing the administrative burden.
Finally, self-insurance demands extensive documentation. Companies must maintain detailed records of loss estimates, document the methodologies used for calculations, and establish clear audit trails. As business risks grow, so does the documentation burden, placing further strain on internal resources.
Conclusion: Selecting the Right Risk Management Approach
Deciding between trade credit insurance and self-insurance depends on factors like your business size, industry, growth plans, and risk tolerance. Each approach has its strengths, and understanding them can help you make the choice that aligns with your goals.
Trade credit insurance offers consistent costs and broad financial protection. It ensures coverage against non-payment and frees up capital, making it especially beneficial for businesses expanding into international markets. In fact, nearly $3 trillion of global trade was backed by trade credit insurance in 2021. As Mike Libasci, President of International Fleet Sales, highlights:
"Accounts receivable insurance has allowed us to take on customers and transactions we wouldn’t have felt comfortable taking on by ourselves… It has not only allowed my company to take on larger deals, but be more liberal in terms, and the result has gone straight to our bottom line."
On the other hand, self-insurance is typically suitable for larger organizations with substantial cash reserves and advanced risk management systems. While it offers greater control, it also places significant demands on internal resources and exposes businesses to potentially large losses. Managing self-insurance involves complex tasks like detailed documentation, actuarial analysis, and regulatory compliance, which can strain internal teams.
Trade credit insurance simplifies these challenges by reducing administrative burdens and offering streamlined financial reporting. Providers such as Accounts Receivable Insurance offer specialized services, including risk assessments, ongoing monitoring, and access to a global network of credit insurance carriers. This external support can be invaluable for businesses that prefer not to build extensive internal risk management capabilities.
For some businesses, a hybrid approach – using trade credit insurance for certain risks while self-insuring others – can strike a balance between cost efficiency and protection. This strategy allows you to tailor risk management to specific customers or markets.
When weighing these options, consider the total costs, including administrative efforts, opportunity costs, and potential losses. Trade credit insurance provides professional support and comprehensive protection, while self-insurance requires vigilance and exposes you to unpredictable risks.
Ultimately, the best strategy is the one that aligns with your business objectives and risk profile, ensuring both stability and growth opportunities.
FAQs
How does trade credit insurance support a company’s international expansion compared to self-insurance?
Trade credit insurance is a key tool for businesses aiming to grow in international markets, offering protection against the risk of non-payment. These risks can arise from factors like political unrest, economic instability, or unexpected financial troubles with overseas buyers. By having this coverage, companies can extend credit to international customers with confidence, knowing they have a safety net against potential losses. This assurance not only supports smoother operations but also opens doors to new market opportunities.
In contrast, self-insurance involves setting aside funds to cover potential losses, but it comes with limitations. The unpredictable nature of international trade means that a single major default could severely impact a company’s finances. This makes self-insurance a far riskier option for businesses looking to expand globally. Trade credit insurance provides a more secure way to manage financial risks while exploring growth in foreign markets.
What should businesses consider when choosing between trade credit insurance and self-insurance?
When deciding between trade credit insurance and self-insurance, businesses should weigh a few important factors. Risk protection stands out as a key consideration. With trade credit insurance, companies can safeguard up to 90% of unpaid invoices, providing a crucial financial safety net. In contrast, self-insurance means taking on the full burden of bad debts, which can be a significant risk.
Another factor to examine is cash flow management. Trade credit insurance can help free up working capital by reducing the need to reserve funds for potential losses. This allows businesses to channel those resources into growth and operational activities. On the flip side, self-insurance requires setting aside money to cover bad debts, which can tighten liquidity and limit flexibility.
The right choice ultimately hinges on your company’s risk tolerance, financial health, and long-term objectives. For businesses looking for security and room to grow, trade credit insurance may be the better option. However, companies with substantial cash reserves and a higher appetite for risk might find self-insurance more suitable.
Can a company use both trade credit insurance and self-insurance to manage credit risks, and how does that work?
Yes, businesses can use a mix of trade credit insurance and self-insurance to handle varying levels of credit risk more effectively. This blended strategy allows companies to safeguard themselves against major, unpredictable losses while taking on smaller, more manageable risks.
For instance, a company might rely on trade credit insurance to protect high-value accounts or clients that carry a greater risk of default, such as those impacted by insolvency or political unrest. At the same time, self-insurance can cover smaller accounts or risks the business feels confident it can handle financially. This approach not only helps maintain steady cash flow but also ensures resources are allocated wisely based on the potential size and likelihood of each risk.
