Account Receivable Put Contracts
What is an Account Receivable Put Contract?
An Account Receivable Put (A/R Put), also known as a Credit Protection Agreement, is a financial product designed to protect businesses from the risk of non-payment by their customers due to bankruptcy. It is a form of credit risk mitigation typically used when a buyer’s financial condition becomes too risky to cover under traditional credit insurance.
Key Points:
- Purpose:
- An A/R Put is primarily used to protect the seller (or creditor) from the risk of default by a customer.
- It is typically employed when the customer’s financial health deteriorates to the point where traditional credit insurance no longer covers them.
- Risk Mitigation:
- The A/R Put acts as a safety net, providing the seller with protection against non-payment of accounts receivable, due to the buyer’s bankruptcy or other severe financial challenges.
- Coverage Duration:
- The coverage period for an A/R Put can range from 3 to 12 months, depending on the risk level and the specifics of the agreement.
- Pricing:
- The price of an A/R Put is dependent on the degree of risk involved. The higher the perceived risk of the customer defaulting, the higher the cost.
- Pricing is typically structured on a monthly premium basis, though it can vary based on the terms of the agreement.
- Usage:
- When a customer is deemed to be “too risky” for standard credit insurance, the A/R Put can be used as an alternative tool to insure receivables.
- The seller can then focus on business operations without worrying about the buyer’s insolvency.
Example of Use:
A company might use an A/R Put when they have a large, at-risk client, and traditional credit insurance won’t cover the exposure due to that client’s deteriorating financial condition. If the customer goes bankrupt within the coverage period, the seller would be reimbursed for the unpaid receivables, based on the terms of the agreement.
