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Accounts receivable insurance

Accounts receivable insurance protects your small business from financial losses when you can’t collect money from clients or customers. This type of insurance is also called trade credit insurance.

What does accounts receivable insurance cover?

Adding an accounts receivable insurance endorsement to your commercial property insurance can improve your risk management strategy.

An accounts receivable endorsement covers two main scenarios related to customer non-payment:

  1. When your accounts receivable records have been damaged or destroyed in a covered loss.
  2. When a customer fails to pay their invoice due to organizational conflicts.

If your accounts receivable records are damaged in a covered incident (like a fire or flood), some of the specific costs that would be covered would be:

  • Records recovery: An accounts receivable insurance policy can cover the cost of recovering your lost or damaged accounts receivable records. For example, if you needed to hire an IT professional to recover the lost data, your insurance would pay for it up to the credit limit.
  • Interest payments on loans: If your accounts receivable records are damaged by a covered event (such as a fire) and you get a loan to keep the business afloat, your accounts receivable insurance coverage will cover the interest payments.
  • Collection costs: Your accounts receivable insurance will pay for collection costs that exceed the normal amount if the department’s records are damaged or destroyed. This might include hiring a temporary bookkeeper to follow up with customers and send payment reminders.

If your accounts receivable department is facing financial losses due to customer insolvency, here are some potential situations where your insurance would kick in:

  • Customer bankruptcy: If a customer goes bankrupt and they have outstanding debt, your accounts receivable insurance policy will cover the amount owed, up to the policy’s limit.
  • Political risks and liability: If a client or customer are not able to pay their debts due to political reasons, such as sanctions, embargoes, or issues with currency convertibility, your accounts receivable insurance would cover your business’s monetary losses.
  • Refusal to pay: Accounts receivable insurance will also provide reimbursement if a client refuses to pay for your goods or services based on the terms of your contract agreement.
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How does accounts receivable insurance work?

Accounts receivable insurance is usually obtained through an extended coverage endorsement on a commercial property insurance policy or a business owner’s policy (BOP). However, an endorsement may only cover accounts receivable record losses that occur from damage to buildings or business property. If you want coverage against a wider range of losses, you should purchase a standalone accounts receivable insurance policy.

The purpose of accounts receivable coverage is to protect against credit risk and bad debt that can negatively impact your cash flow and balance sheet. When you experience a covered loss based on the terms of your policy, your insurance provider will compensate you to avoid a serious hit to your company’s assets.

Because records damage is different from other types of property damage (particularly if they are electronic records), insurance companies use a specific formula to calculate the losses. Although the exact formula differs between insurers, most companies use the total accounts receivable for the 12 months before the loss, and then divide that number by 12.

For example, imagine your small business made $450,000 in the year before a covered loss. Your average monthly receivable would be $37,500, which would be used to determine your insurance payout. Depending on the nature of your business, the insurance company may adjust the amount to reflect seasonal revenue fluctuations.

Similar to accounts receivable coverage, a business interruption insurance policy would also help provide financial protection if your business suffers losses from property damage. However, this focuses more on the interruption of business operations due to a catastrophic event, and recovering account records would likely fall out of its scope.

For example, if your business suffered a fire that destroyed most of your office space and the financial records within, business interruption coverage would help help pay for lost revenue or day-to-day operating costs to help keep your business afloat until you can reopen, while accounts receivable insurance would help pay for the recovery of the damaged financial records.

How much does accounts receivable insurance cost?

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The cost of accounts receivable insurance largely depends on your business’s total sales.

Accounts receivable insurance premiums are often around $1 to $1.50 per $1,000 of sales. So, a small business that does $700,000 in sales per year can expect to pay at least $700 per year for coverage.

Your accounts receivable insurance premium will depend a number of factors, including:

  • The industry your business operates in
  • The number of employees you have
  • Your location
  • Your coverage limits
  • Your deductible

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Ready to get accounts receivable insurance for your small business? Complete Insureon’s easy online application today to get a quote for commercial property insurance, a business owner’s policy (BOP), and other kinds of business insurance from top-rated U.S. carriers. Once you find the right policy, you can get coverage in less than 24 hours.

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Updated: September 13, 2022
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