The Value of Trade Credit Insurance for Private Equity Firms

Posted by Edward McNamara on July 01, 2020

When looking for strategies that can help a private equity firm protect the investments in its portfolio and give them a competitive edge, many executives are now turning to Trade Credit insurance as a solution. 

While typically employed by CFOs and business owners to protect a company from losses due to creditor defaults or insolvent customers, Trade Credit Insurance is becoming increasingly popular and beneficial for PE firms to help strengthen banking relationships, simplify due diligence and maximize their leverage in deal negotiations. 

Banks typically look at a company’s accounts receivable as a “risk complication” and not an enhancement when considering financing for a PE deal. Trade Credit insurance protects the bank by guaranteeing the performance of the asset and provides the comfort level to allow for greater working capital financing (both before and after acquisition) by increasing the range of receivables that can be financed. 

For a private equity firm, another benefit of Trade Credit Insurance is the underwriting process, which involves substantial due diligence of the accounts receivables presented on the buy side.

You might think of it this way: If you purchased a home and, upon inspection, discovered the foundation needed repair, a contingency would be added to fix the problem.  In similar fashion, when purchasing this kind of insurance the underwriting process gives PE firms added leverage in deal negotiations to accommodate for potential losses from bad debt. 

Finally, as we have been reminded by the current COVID-19 environment, the potential for catastrophic A/R loss is very real. When a PE firm uses Trade Credit insurance, they are providing another layer of protection on top of the portfolio companies’ risk strategies. 

While property, inventory and employees are usually considered in a company’s risks strategy, the largest asset--accounts receivable--is often left unprotected. PE firms can provide that additional level of insulation from disaster through Trade Credit insurance, which benefits both the companies in their portfolio and the lenders looking to finance the investment. 

Call Armada Risk Partners today to learn how we can help protect your investment and grow the strength of your portfolio.


About the author Edward McNamara

Ed McNamara is CEO and founder. With his partners, he delivers protection and growth at their full-service commercial insurance brokerage. Their proprietary examinations of risk profiles gives them a window into client challenges and opportunities. This perspective helps them to identify prospective customers, partners, and strategic suppliers in their fleet who – through personal introductions – can enable their clients to grow, prosper, and become more competitive.