Trade Credit Insurance – In the complex web of global commerce, businesses frequently extend credit to their customers, a practice that fosters growth and cements long-standing business relationships. However, this financial leap of faith comes with its own set of risks, including the possibility of customer default due to insolvency, bankruptcy, or political trouble.
Sadly, these events can impact a company’s cash flow negatively and jeopardize its financial stability. This is where trade credit insurance appears to be an important risk management tool. It is also designed to protect businesses from the financial loss that comes with the non-payment of commercial debt.
On the other hand, trade credit insurance allows companies to navigate the troubling waters of credit risk. So, if you are a small enterprise looking to expand your customer base or an international corporation looking to strengthen your financial standing, this will be a game changer for you.
What is Trade Credit Insurance?
Trade credit insurance, also known as debtor insurance or accounts receivable insurance, is a financial product designed to safeguard businesses against losses caused by the non-payment of commercial debt.
This can happen due to reasons like bankruptcy, prolonged default by a buyer, or insolvency. Hence, this type of insurance protects the company’s cash flow, making it easy to handle the risks and threats that come with selling goods and services on credit, both domestically and internationally, by covering a portfolio of buyers.
How Does it Work?
The price of insurance products is influenced by the anticipated risk associated with insuring the policyholder. Insurers assess a business’s risk by examining factors like the number of transactions a client conducts, the financial reliability of its customers, the sector it operates in, and the agreed repayment conditions with its buyers.
According to Meridian Finance Group, a specialized insurance brokerage, the cost of coverage usually amounts to less than 1% of the value of insured sales.
Businesses have the flexibility to adjust their insurance coverage according to their financial capabilities and risk assessment. They might opt to insure just one particular client, especially if that client represents a significant or high-risk account, or they could choose to cover a limited number of clients. Additionally, some insurance policies offer supplementary coverage that comes into effect if the primary policy does not fully address a claim.
Insurance companies generally set a specific credit limit for each of a client’s insured trade partners based on their financial stability. If a buyer does not fulfill their payment obligations for goods or services, the insurer will compensate for the loss, but only up to the predetermined limit of indemnity.
What Does Trade Credit Insurance Cover?
Any loss associated with the non-payment or default of commercial debt is typically covered by trade credit insurance. The basic coverage options include:
- Insolvency or bankruptcy.
- Default.
- Political risks.
However, this factor differs from one insurance company to another, so keep this in mind while shopping.
What Does It Not Cover?
While trade credit insurance offers broad protection, certain exclusions apply:
- Disputes over goods or services.
- Fraudulent transactions.
- Currency fluctuations.
- Indirect losses.
The insurance provider also determines this part of the quote as well.
How Much Does Trade Credit Insurance Cost?
The cost of trade credit insurance varies depending on several factors, including the total coverage amount, the risk profile of the covered buyers, the industry sector, and the historical loss experience of the insured. Premiums are typically calculated as a percentage of sales or outstanding receivables and can range from 0.1% to 1% of the insured turnover.
How to Get Trade Credit Insurance
This insurance product can help companies feel more secure in giving more credit to current customers or pursuing new, larger customers that would have posed as too-risky borrowers. Here is how to get trade credit insurance:
- Understand your needs.
- Explore Lenders.
- Prepare the necessary information.
- Review the offer and negotiate the terms.
- Finalize the policy.
Understand your needs
Identify the specific risks you want to insure against. These can include customer insolvency, delayed payments, political risks in export markets, and any sector-specific risks. It is also important that you have a clear understanding of your customer base, their creditworthiness, and payment histories. This will help in assessing the level of coverage you need.
Explore Lenders
Look into different insurance companies that offer trade-credit insurance. This includes private insurance firms as well as government export credit agencies if you are exporting goods. Additionally, not all policies are the same. Compare what is covered, the limits of coverage, the deductibles, and the cost. Pay special attention to any exclusions or limitations in the policies.
Prepare the necessary information
You might need to provide your company’s financial statements for the insurer to assess your financial health. You will also need to provide your personal information, as it will be required during the application process.
Review the offer and negotiate terms
Carefully review the terms, coverage limits, premiums, and any deductibles or exclusions in the proposals you receive. Moreover, do not hesitate to negotiate terms with insurers. This can include coverage limits, specific customer coverage, and premium rates.
Finalize the policy
Once you agree to the terms, sign the policy agreement. You can also work with your insurer to implement any recommended risk management practices to help minimize credit risk.
In Conclusion
Getting trade credit insurance can be a strategic decision to protect your business’s cash flow and enable growth by safely extending more credit to customers. It’s important to work closely with your insurer to ensure the coverage meets your business needs and to understand the obligations and requirements under the policy.