In order to understand the concept of accounts receivable coverage, it is necessary to understand the meaning of accounts receivable. Accounts receivable is a business term used in reference to the total sum of money that a business or company is owed by different types of customers, ranging from the corporate entities to the personal debt by customers due to some service that the company may have provided, or some good or product that may have been exchanged by the involved parties. These types of outstanding debt are usually for a limited period that is clearly stated in the agreement between the two parties. As such, the account receivable denotes sums of money that the business in question can expect to receive from the customer by virtue of the concluded transaction between the two parties. This is where accounts receivable coverage becomes necessary, stemming from the fact that it serves as a sort of safeguard regarding the pending payment that the business has on record for a customer, but has yet to receive.
The main reason a business should consider accounts receivable coverage is as a safety net for the company under consideration in the chance that any event occurs that leads to the damage or loss of the records establishing the obligations of the customers and the legal expectations of the business. Usually, when the customer and the business reach an agreement granting the customer some time within which to pay off a debt that is owed for services rendered or goods that may have exchanged hands, a record of this is made and filed by the company. This record will serve the purpose of giving the company a comprehensive list of all of the customers that owe money and how much they owe. Such records are not only necessary for legal purposes, but they are also necessary when the company has a lot of customers and needs some sort of record to establish who is whom and who owes what.
Without the accounts receivable coverage, any type of negative event that affects the records will lead to the loss of this expected money by the company, which is something that could be reimbursed by the insurance company. Assuming there was a burglary on the company premises that led to the loss of the records, the accounts receivable coverage would come into play. The accounts receivable insurance also covers any type money that the company may spend in its quest to recover the lost records. Another feature that would be covered by the accounts receivable coverage is any loss that the company may suffer as a result of a defaulting customer or in the event that a person or entity owing some money to the company declares bankruptcy.
