High Risk Cover

What Is High Risk Cover?

High Risk Cover is a financial instrument used to protect against the risk of your commercial buyer’s insolvency. These are generally used on debtors that are beyond the risk appetite of trade credit insurers.

The counterparty that offers this protection writes a contract for a defined period, generally between 3-12 months. The contract states that should the buyer file bankruptcy during the time the contract is in place, the counterparty buys the customer’s receivables, up to a specified limit, at a stated rate ranging from 80% to 100%.

For example, a company may buy a $100K credit limit on its buyer, ABC Co., at a rate of 0.75% per month for six months, a total contract of $100K x 0.75% x 6 = $4500 with a purchase rate of 90%. Should the buyer file bankruptcy during the six month contract, the counterparty is required to buy the outstanding receivables, up to the $100K limit for $0.90 on the $1.

These are particularly attractive for companies with healthy margins and quick receivable turns, as it is easier to absorb the cost. Enter the data below to find the impact on your margins.

Distressed companies with liquidity concerns may be agreeable to a modest price increase in exchange for receiving credit terms (i.e. an interest free short term loan). This cost of capital may be more advantageous than their interest expense on borrowing through traditional channels.

These are legal contracts and it is advisable you read the fine print and understand all facets before purchasing.

It is equally important you consult with a specialist accounts receivable broker who can obtain multiple quotes from different markets and educate you on the nuances and reporting requirements of each.