Leveraging the receivables assets and predicting future credit defaults for IFRS9.
Trade Receivables or Trade Debtors, is an asset sitting on the balance sheet which can be secured and enhanced using credit insurance. Aon can work with you to explore how the use of credit enhancement may provide benefits to your organisation such as increasing cash flow, reducing the costs of funding, reducing net debt, whilst also protecting the balance sheet under a strong corporate credit risk management programme.
Credit insurance can mitigate the risk posed by reliance on critical customers, which may increase financial exposure if they fail to make payments for your services. Incorporating the use of a well-structured trade credit insurance policy may also allow (i) you to more accurately predict future credit losses (IFRS 9) and (ii) to reduce the bad debt provision, which could amount to significant sums, being released back to the P&L.
Efficiently converting trade receivables into cash.
Insurance backed Trade Finance is a wide-ranging term. An example would be using an insurance ‘wrapped’ portfolio of trade receivables as the security under an Asset-Backed Loan Facility, similarly, trade receivables can also be wrapped to support securitisation and off-balance sheet financing facilities.
The insurer’s credit rating allows the financier to mitigate credit concentration risk and may result in higher upfront cash advances, increased eligible receivables and a reduced cost of funds.
Selling the receivable effectively reduces the DSO (Days Sales Outstanding) cycle and enhances the cash position on the balance sheet, which provides the treasury team with more opportunities to reduce net debt or reinvest within the business.
If we can achieve an arbitrage position, such as the benefit (improved finance facility/cost of funding) is greater than the cost of the insurance, then we have a win-win solution.
Aon UK Limited is authorised and regulated by the Financial Conduct Authority. FPNAT.391