Can Trade Credit Insurance Help You Borrow More?

Can Trade Credit Insurance Help You Borrow More?

Why Receivables Matter to Lenders

For many businesses, accounts receivable are the largest asset on the balance sheet and the primary collateral for a revolving line of credit or asset-based loan. Lenders advance against eligible receivables at a specified advance rate — typically 75 to 85 percent of eligible receivables — and the borrowing base fluctuates as receivables are created and collected.

The lender's advance rate and eligibility criteria reflect its assessment of the risk that the receivables will not be collected. Receivables that the lender views as higher risk — because of the buyer's creditworthiness, the buyer's location, or concentration concerns — may be excluded from the borrowing base or advanced at a lower rate.

Potential Financing Benefits

Trade credit insurance can sometimes affect a lender's treatment of receivables in ways that increase borrowing-base availability. The potential benefits depend on the lender's policies and the specific terms of the insurance, but may include:

  • Higher advance rates on insured receivables, reflecting the reduced risk of non-collection.
  • Inclusion of receivables that would otherwise be excluded — such as foreign receivables or receivables from buyers the lender views as higher risk.
  • Relief from concentration limits for insured buyers, allowing a larger share of a concentrated customer's receivables to be included in the borrowing base.
  • Access to a larger overall borrowing base, supporting greater working capital availability.

These benefits are not automatic. The lender must agree to modify its borrowing-base treatment, and the insurance policy must be structured in a way that the lender finds acceptable — typically including an assignment of the policy to the lender and a loss-payee endorsement in the lender's favor.

Example 1: Higher Advance Rate

A company has $8 million in domestic accounts receivable. Its lender currently advances at 80 percent against eligible receivables, giving a borrowing base of $6.4 million. The company obtains trade credit insurance covering its receivables portfolio and assigns the policy to the lender.

The lender, satisfied that the insurance reduces its collection risk, agrees to advance at 85 percent against insured receivables. The borrowing base increases to $6.8 million — an additional $400,000 in available working capital — without any change in the underlying receivables. The actual advance rate and any change in borrowing-base treatment are determined solely by the lender.

Example 2: Customer Concentration

A company has $10 million in total receivables. One customer represents $3 million — 30 percent of the total. The lender applies a 20 percent concentration limit, excluding $1 million of that customer's receivables from the borrowing base. The effective borrowing base is $7.65 million (85 percent of $9 million eligible).

The company obtains trade credit insurance specifically covering the concentrated customer and assigns the policy to the lender. The lender agrees to waive the concentration limit for that customer, making all $10 million eligible. The borrowing base increases to $8.5 million — an additional $850,000 in available working capital. Again, the lender's decision to waive the concentration limit is entirely within the lender's discretion.

Foreign Receivables Can Create Another Opportunity

Many lenders exclude foreign accounts receivable from the borrowing base entirely, or advance against them at a significantly lower rate, because of concerns about collection risk, political risk, and the difficulty of enforcing rights in foreign jurisdictions. Trade credit insurance — particularly policies that cover both commercial and political risk — can sometimes address those concerns.

When a lender is willing to include insured foreign receivables in the borrowing base, the effect can be significant for companies with substantial international sales. A company that previously received no borrowing-base credit for its foreign receivables may find that insured foreign receivables are treated similarly to domestic receivables — subject to the lender's own policies and the terms of the insurance.

What Should a CFO Ask?

CFOs considering trade credit insurance as a financing tool should ask:

  • Is our lender familiar with trade credit insurance, and has it worked with insured borrowers before?
  • What would the lender require in terms of policy terms, assignment, and loss-payee arrangements to modify its borrowing-base treatment?
  • Are there specific receivables — foreign, concentrated, or otherwise excluded — that the lender might include if they were insured?
  • What is the cost of the insurance relative to the additional working capital that might be available?
  • Are there any covenants or conditions in our credit agreement that would affect how the insurance is structured?

Important Considerations

Trade credit insurance is not a guaranteed path to a larger borrowing base. Several important caveats apply:

  • The lender always determines borrowing-base eligibility, advance rates, and collateral requirements. The insurance does not obligate the lender to change its treatment of receivables.
  • Not all lenders are familiar with trade credit insurance or willing to modify their borrowing-base formulas for insured receivables.
  • The insurance policy must be structured in a way that the lender finds acceptable, including appropriate assignment and loss-payee provisions.
  • The cost of the insurance must be weighed against the benefit of any additional borrowing capacity.
  • Coverage, underwriting, and policy terms vary by insurer and transaction.

The Bottom Line

For companies with significant receivables portfolios — particularly those with foreign receivables, concentrated customers, or lenders who currently exclude certain receivables from the borrowing base — trade credit insurance may be worth exploring as a financing tool. The key is to have an early conversation with both the lender and a knowledgeable insurance broker to understand what is possible and whether the economics make sense for your situation.

This article is for general informational purposes only and does not constitute insurance, legal, financial, or tax advice. Coverage terms, conditions, exclusions, lender requirements, and availability vary by insurer, lender, and transaction. Consult with a qualified insurance and financial professional regarding your specific situation.

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