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The Value of Trade Credit Insurance for Private Equity Firms

By July 1, 2020April 27th, 2021Armada Blog

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.