For businesses dependent on supply chains, a bankruptcy at any point in the chain can cause worry about the ripple effect. A supplier to a company that goes into receivership is at the mercy of the appointed receiver and the liquidation process.
A proactive approach to managing supply chain financial risk is the best approach.
A proactive approach begins with your board of directors. One of the cornerstone duties of the board is financial oversight, which, in addition to reviewing internal financial reports, includes analyzing industry trends and financial outlooks to ensure the organization has adequate cash flows and financial resources to weather anticipated storms.
During such times, proactive boards create audit committees of individuals with greater financial expertise and skill to handle the situation.
There are two insurance-specific tools that an organization can turn to in order to relieve the financial impact and the worry caused by a supply chain upheaval: credit insurance and directors & officers coverage.
Credit Insurance – What is it and what can it do for your business?
Businesses with credit insurance can expand into new markets and new customer bases by minimizing concerns of non-payment. Simply put, credit insurance is a financial tool used to cover a company’s commercial accounts receivables should the buyer become insolvent. Sometimes referred to as “bad-debt” coverage, the average policy will reimburse the insured 85 percent-95 percent of their invoice amount.
A major benefit to purchasing credit insurance is that you, the insured, has an insurance company on your side that continuously monitors the financial health of your buyers and alerts you to any changes.
Options include coverage for the non-reimbursement of advance payments made to suppliers, non-payment due to political events, disputed debts, and even natural disasters. A savvy purchaser of credit insurance can find many ways to leverage the policy to not only protect the bottom line, but grow the top line.
- Businesses with credit insurance can expand into new markets and new customer bases by minimizing concerns of non-payment.
- Companies looking to grow international sales can utilize trade credit insurance in non-domestic markets. By offering flexible credit terms, a company can become the supplier of choice – gaining a competitive edge.
- Finally, with the accounts receivables covered by insurance, a company may have leverage to access working capital from a lender.
Directors & Officers Liability Coverage
Should your organization consider purchasing directors and officers (D&O) liability policy at a time of anticipated financial stress in the industry? The short answer is yes. If your organization hasn’t purchased a D&O policy in the past, it’s possible – and wise – to pursue one now. D&O coverage is the primary defender of management decisions including those of your creditor committee.
Lenders like to see companies purchase both credit insurance and directors & officers liability insurance as proactive tools in managing financial risks.
Adding your insurance broker to your financial risk management team, along with your banker and accountant, is a smart move for your organization. By taking a proactive approach to strengthening your supply chain resilience, you’ll have access to the right financial risk management tools for your unique operation when you need them.
This blog post is based on an article by Jen Pino Gallagher, originally published in the January 2020 issue of The Cheese Reporter. M3’s Food & Agribusiness professionals are regular contributors to the Cheese Reporter. Read the full article as well as other recent M3 articles on cheesereporter.com.