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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.”

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