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What is Trade Credit Insurance?
Most businesses allow customers to purchase goods or services without being paid upfront. This can be risky, with the possibility that your customers may not pay on time, or worse, not at all. Trade Credit Insurance can offer a solution.
What is Trade Credit Insurance?
Trade Credit Insurance protects your business from the financial impact of bad debts. This is a specialist insurance covering the financial risks related to your customers, it’s offered by a handful of insurers only. Cover is for customers who don’t pay their debts due to their insolvency, default, bankruptcy, or other reasons agreed with the insurer. Insurance can be purchased either on groups of customers or all debtors.
Trade Credit Insurance has limits. It doesn’t assist with managing debtors and only pays an agreed percentage (usually 80% – 90%) of the outstanding debt once the debtor has been declared insolvent or bankrupt.
Benefits of Trade Credit Insurance
In addition to protecting your working capital, Trade Credit insurers can provide credit reports on individual customers or specific industries’ current or developing risks to help you better manage your customer base and the financial risks of the business.
Some additional benefits of Trade Credit Insurance include:
- Protection against unpaid invoices and bad debts
- Improved cash flow management
- Enhanced credit risk management
- Access to valuable market intelligence
- Support for expansion into new markets
- Increased confidence in offering competitive credit terms
How Trade Credit Insurance Works
Trade Credit Insurance works by protecting your accounts receivable against non-payment. When a customer fails to pay, the insurance policy kicks in, typically covering 80-90% of the outstanding debt. This helps maintain your cash flow and protects your business from potentially devastating losses.
The process typically involves the following steps:
- You sell goods or services on credit to your customers
- You notify your insurer of potential buyers and request credit limits
- The insurer assesses the creditworthiness of your customers
- You receive coverage for approved customers up to the agreed credit limits
- If a customer fails to pay, you file a claim with your insurer
- The insurer pays out the agreed percentage of the unpaid debt
How are Trade Credit Insurance premiums calculated?
The cost of Trade Credit Insurance is calculated as a percentage of the turnover or group of customers to be covered, as well as the level of risk for the industry or sector.
Premiums will be assessed based on your trading history, specific larger customer financial credit ratings, credit terms, loss history, business sector, customer location and factors such as the need for non-cancellable credit limits or whole turnover cover.
Insuring your accounts receivable is a little different from any other insurance policy regarding questions about cost. As with most insurance policies, price is calculated against risk and specific requirements, which means that every policy is costed individually. You can also look to reduce the premium cost by taking
higher excesses/ retention amounts.
Types of Trade Credit Insurance Coverage
Trade Credit Insurance policies can be tailored to meet your specific needs. Some common types of coverage include:
- Whole turnover cover: Insures your entire accounts receivable ledger
- Key account cover: Protects your largest or most important customers
- Single buyer cover: Ensures a specific customer or contract
- Export credit insurance: Covers international trade risks
These tailored insurance solutions allow businesses to protect their trade receivables effectively while managing credit risk.
Choosing the Right Trade Credit Insurance Policy
When selecting a Trade Credit Insurance policy, consider the following:
- Coverage limits: Ensure the policy provides adequate protection for your needs
- Exclusions: Understand what risks are not covered
- Claims process: Look for insurers with straightforward and efficient claims procedures
- Additional services: Consider the value of extra risk management tools and services
- Insurer reputation: Choose a leading provider with a strong track record in your industry
Trade Credit Insurance Benefit
Trade Credit Insurance can provide valuable protection for businesses that offer credit to their customers. Your professional adviser can work with you to understand what Trade Credit Insurance is, what it covers, and what it does not cover so you can make an informed decision about whether or not it is right for your business.
When considering Trade Credit Insurance, we can help evaluate your overall business risks and work with you to put into place the right level of coverage for your business and needs.
In today’s uncertain economic climate, Trade Credit Insurance is becoming an increasingly essential tool for businesses of all sizes. By protecting your accounts receivable and providing valuable risk management insights, it can help you navigate challenges, seize opportunities, and build a more resilient business.