For decades, the best a company could do to protect itself from getting stuck with an uncollectible receivable from a customer bankruptcy was to make careful credit decisions; insist on cash in advance or letters of credit for new orders; or buy credit insurance on a broad portfolio of receivables, most of which were almost certainly collectible. None were foolproof, and some proved expensive. But the innovative capital markets have developed a product that allows companies to hedge only the bad apples. Accounts receivable (A/R) put options are not cheap, but they provide a specific hedge only where it's warranted. "You buy insurance for unseen risks; you buy a put option for a seen risk," notes trade credit consultant David Schmidt, principal of A2 Resources, based in Yardley, Pa. "At first, only a few boutiques were doing it, but now there are a ton."

But while more hedge funds and investment banks are offering A/R puts, many finance professionals remain unclear as to how and when to use them–if they are aware of their existence at all. "This is a good tool, but not one that is widely understood," observes Terry Callahan, president of the Credit Research Foundation. "A CFO is more likely to understand the concept than a typical credit manager or insurance manager, but I'm not sure the buzz about this product is even reaching a lot of CFOs."

One of the beauties of the credit put option is its ability to be customized, explains Michael Gatto, a partner at $6 billion put provider Silver Point Capital. A credit put can cover a specific shipment or a stream of shipments; it can cover whatever time period the buyer chooses; it can pay 100 cents on the dollar or 10 cents. The trade creditor can choose the event that triggers the right to put the A/R and define the risk to be transferred, The underwriter will quote prices, and if creditors want to pay less, they simply choose where to transfer less risk.