Trade credit insurance, in its simplest form, is business-to-business accounts receivable (AR) insurance protecting the insured (the seller or the policyholder) against the risk of losses arising from a buyer’s failure to pay the amounts due to the insured.
Trade Credit Insurance protects businesses’ financial health against their customer’s non-payment due to commercial &/or political risks.
Trade receivables are assets of the company and need protection. With the Trade Credit Insurance in place, your business will no longer have to worry about payment defaults of the customers. This insurance will protect your balance sheet, and you can profit from bad debts.
Understanding Trade Credit Insurance
Trade Credit Insurance protects businesses from non-payment from their customers against commercial and political risks.
Commercial risks cover delays in payments and insolvency of the customers.
Political risk- non-payment due to Moratorium, Transfer Restriction / Inconvertibility, War, Import/ Export Restriction, License Cancellation.
How Trade Credit Insurance Works?
- Application Form– Insurers require the business to fill out the application form with all the details, allowing the Insurer to assess the applicant and work on the premiums. Trade Credit Insurance policy premium rates are based on sales volume, credit terms, customer base, and industry risk.
- Credit Limits– The Insurer also assesses the creditworthiness of the insured business’s customers and sets credit limits for each customer.
- Onboarding– upon acceptance of the terms by the applicant, the Insurer issues a trade credit insurance contract and provides online access to their portal for policy management.
- Credit Limit Monitoring– The Insurer periodically monitors the policyholder’s customers’ credit limits and advises their clients in case of any adverse information. This monitoring helps the policy holder as heads up and supports to make effective and informed decisions and
- Obligations of the insured/policyholder – As insured/policy holder, there are certain obligations to be followed, the most important is reporting of any delay in payments from the insured customers.
- Claims Filing– If a customer fails to pay due to insolvency or default, after overdue reporting, the insured business can file a claim with the Insurer, typically after a waiting period.
- Claims Payment– Upon approval of the claim, the Insurer reimburses the insured business for the covered amount, reducing the financial impact of the non-payment.
Types of Trade Credit Insurance Coverage
There are different categories/types of credit insurance products offered by our partners/insurers. The most common vanilla product is the whole turnover credit insurance policy.
Below are list of short term credit insurance policies:
- Whole turnover– portfolio insurance covering all customers trading on open credit.
- Key Accounts– Covers companies largest customers
- Single Buyer– Covers single buyer where the exposures are substantially high.
- Excess of Loss– Catastrophic losses are usually covered with risk sharing options.
- For banks and financial institutions– Factoring and invoice discounting.
Some export credit agencies also have products to cover Medium and Long term risks – typically up to 7 years and more. These products are for investors/EPC contractors and cover Political risk.
Benefits of Trade Credit Insurance
- Protects cash flow: Helps businesses mitigate the impact of bad debts and maintain a healthy cash flow.
- Facilitates growth: Enables businesses to extend credit to new customers or expand sales to existing ones with reduced risk.
- Enhances financing options: Provides reassurance to lenders and investors, making it easier for businesses to secure financing.
- Improves competitiveness: Allows businesses to offer competitive credit terms without fearing non-payment.
- Expand into new markets: credit insurance helps to expand into new geographies with confidence and boosts the growth of the insured business.
Exclusions and Limitations of Trade Credit Insurance
- Trade Credit Insurance policies may have exclusions and limitations, such as coverage limits, waiting periods, and exclusions for certain industries or regions.
- Insurers may impose conditions like credit management requirements or mandatory reporting of overdue accounts.
Conclusion
- Trade Credit Insurance is a valuable tool for businesses to protect against non-payment risk and maintain financial stability.
- By transferring credit risk to insurers, businesses can safeguard their cash flow, facilitate growth, and enhance competitiveness in the marketplace.
Overall, Trade Credit Insurance provides businesses with peace of mind and financial security in an uncertain trading environment, enabling them to focus on core operations and strategic growth initiatives.
