All You Need to Know About Trade Credit Insurance

Businesses use trade credit for large orders that are hard to pay all at once. This option has pros and cons. With trade credit, clients can buy now and pay later on agreed dates instead of paying up front.

The advantage: clients may order more. The biggest risk: clients might not pay because of bankruptcy or other issues.

Trade credit insurance is vital in today's economy and can save businesses millions. This article covers why businesses need it and what it includes.

What is Trade Credit Insurance?

Even reliable clients can have cash flow problems and delay or miss payments. Trade credit insurance protects businesses if clients don’t pay or pay late due to business or political issues.

This insurance pays a percentage of what isn’t paid, helping the business keep running. Late payments can disrupt business operations. Typically, insurance covers 75-90% of unpaid invoices. Coverage can be for all clients or just specific accounts.

Many reasons may affect the supplying business and the client’s ability to pay their dues (as discussed in the following section).

What Does Trade Credit Insurance Cover?

Insolvency

If insolvency is not addressed promptly and appropriately, it can lead to bankruptcy. For example, the international toy brand Toys “R” Us was insolvent for years and eventually declared bankrupt in 2017 after unpaid debts added up to $ 5 billion.

Insolvent companies may be unable to pay the full amount owed or may request an extension. Although insolvency can be temporary, this situation creates significant challenges for creditors awaiting payment.

How Trade Credit insurance helps Cover Insolvency non payments?

These situations are unfair to suppliers, manufacturers, traders, or firms that the insolvent company does not pay. Trade credit insurance can protect these companies from financial loss. If that specific account is covered, the insurance will reimburse a large portion of the unpaid amount. The insurance will protect your company so that your business is not impacted by another company’s falls.

Bankruptcy 

Bankruptcy occurs when a company can’t pay its debts and declares itself legally insolvent. If your client goes bankrupt, you may never get paid back, even after their assets are sold. This can be a major loss for any business.

Even large companies can suddenly file for bankruptcy. For example, GNC, a well-known health supplement brand, filed for bankruptcy in 2022 and may not have been able to pay suppliers or manufacturers.

Will Trade Credit Insurance Cover Non-Payment Due to a Bankrupt Client?

After liquidation, the money recovered is often much less than what’s owed. Trade credit insurance can help by investigating the case and paying back a portion of the loss. Make sure your policy covers accounts at risk of financial trouble to stay protected.

Political Risks

Some risks, like war, new laws, or disasters, are out of any business’s control. These political risks can stop payments and disrupt business.

The war in Ukraine is a clear example: many international companies that delivered goods to Ukraine now face major payment challenges. In response, Ukraine asked its international creditors—including governments and large investment firms—to pause debt payments for two years to stabilize its economy.

Does  Trade Credit Insurance Cover Political Risks?

When political risks cause non-payment, even the most understanding companies suffer financial losses. Trade credit insurance helps by covering part of these losses, offering businesses vital protection when payments are disrupted by political events.

Who Needs to Purchase Trade Credit Insurance?

Trade credit insurance protects B2B companies that sell on credit, sometimes saving them thousands or even millions. Not every business needs it, but it’s valuable for those at risk of non-payment.

It’s ideal for international vendors, manufacturers, suppliers, and B2B finance. Even if your clients pay on time now, future risks are unpredictable. Trade credit insurance doesn’t cover cash sales, buyers already in trouble, intercompany sales, or sales to domestic public buyers.

Benefits Of Trade Credit Insurance for Any Company

With trade credit insurance, companies providing products or services gain a safety net against clients who may delay or default on payments, thus safeguarding their balance sheets. Even major clients can face commercial or political risks that hinder payments. Trade credit insurance helps mitigate the impact of such issues.

Purchase trade credit insurance to protect specific accounts or your entire portfolio—trust no one with credit payments.

Trade Credit Insurance FAQs

Can trade credit insurance help my business expand into new markets?

Yes, trade credit insurance can give your business the confidence to work with new customers or enter new markets by reducing the financial risks associated with unfamiliar buyers.

Does trade credit insurance cover international transactions?

Most trade credit insurance policies can be tailored to cover both domestic and international sales, protecting your business from non-payment risks worldwide.

How does a claim process work if a customer fails to pay?

If a customer defaults, you typically submit a claim with documentation of the unpaid invoice. The insurer will review the claim and, if approved, reimburse you in accordance with the policy terms.

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To learn more about trade credit insurance and protect your company’s balance sheet and future transactions, contact Red Asia Insurance.