Bankrupt business, Creditors, trade credit, credit insurance

Trade credit is a payment option used by thousands to millions of companies for their purchases. It enables businesses to receive products or services without paying immediately. Instead, they can pay on an agreed timeline, usually weeks after receiving the product(s).

However, such financial arrangements come with risks that can disrupt the suppliers’ financial stability. One such risk is the possibility that the purchasing business may be unable to pay due to bankruptcy.

When a business declares bankruptcy with limited assets and high debts, suppliers are the ones who suffer the most. Suppliers depend on the payments to reinvest in their business activities, so they are left in a difficult situation when they don’t receive the owed payments.

Our client is a supplier who had to deal with a bankrupt business and was not paid a significant amount. This article will explain how our client dealt with the situation and how trade credit insurance protected their financial future. 

Client Background

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Our client is a growing electronic component supplier in Hong Kong that provides a range of different materials and parts to various companies in Asia. The components include electronic parts, cables, batteries, tools, etc.

Our clients mainly focus on business-to-business deals (B2B), where they provide products in bulk. They work on a trade credit basis due to the large quantity of orders and the financial ease to clients.

They supply products to various industries that use their electronic components for products or services. The client is constantly growing their client base and has a good relationship with all of them.

Most clients have paid their dues on time or just a few weeks late. They have never had a serious issue with non-payment until one of their clients became a bankrupt business.

 Client Problem – Bankrupt Business Non-payment

Our client trusted the now-bankrupt business, as the company consistently met their payment deadlines without fail for years.

Therefore, like every year, our client sent a large order of electronic components to the business. The total cost of the order was HK$450,000, and the payment was due 30 days after receiving the order.

However, the due date passed by several weeks, and the business communicated that they were going through some financial struggle and needed an extension.

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Due to the positive relationship, our client approved the extension and added another 90 working days. There was enough time to adequately profit from the components and pay the credit to our client. 

However, after 90 days, they were still unable to pay their debt, putting them 120-plus days late.

Our client did their best to retrieve the payment and stopped all possible deliveries to the business. In a couple of weeks, the company declared bankruptcy. Unfortunately, this meant they were not liable to pay any of their debt.

The court seized all the bankrupt business assets and planned to sell and split the costs between the various creditors. Unfortunately, in this case, the court/trustee will return the value after months or years and may be nowhere near the non-payment amount.

The non-payment was a significant amount, especially since our client is not a big international supplier and requires every Doller to assist with their business activities

How Trade Credit Insurance Covered the Bankruptcy Non-payment?

Fortunately, our client purchased trade credit insurance to cover the risk of non-payments due to bankrupt businesses. Trade credit insurance is ideal for any company that works in the B2B industry or uses the trade credit payment.

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The insurance will cover non-payment or delayed payments due to commercial or political risks. Commercial risks include bankruptcy and insolvency, while political risks include wars, sudden changes in trade restrictions and government issues.

The insurance will not cover 100% of the lost amount but a large portion, typically 75-90%, depending on the specific policy and limit. Our client’s non-payment loss was 80% covered; therefore, the insurance provider reimbursed HK$ 360,000.

It is also essential to understand the claim procedure is not as short as most policies. Various steps and checks are conducted before the specific value has been reimbursed.

You can read about the process in detail in our article– Trade Credit Insurance Process Businesses Must Know.

Even though the insurance doesn’t cover the entire financial loss, the large portion can help recover and reinvest into the business. Such situations could occur with any client, and trade credit insurance is essential to protect companies from bankrupt business deals.

Conclusion 

Even the biggest companies have gone bankrupt or been affected by political risks. No client is 100% financially stable, and suppliers must understand that. Non-payment due to deals with a bankrupt business can seriously damage a company’s future and balance.

Trade credit insurance is essential even if you believe you have the best client portfolio. In addition, some clients may be secretly high-risk companies that are unstable due to their finances or location. 

Trade credit insurance offers a detailed analysis of clients, which can help understand which clients can be trusted with trade credit payment. With this information, businesses can opt for full client portfolio coverage or just a few client coverage.

Trade credit insurance allows companies to provide their products or services to clients without stressing if payment is late due to a bankrupt business.

 

 

To learn more about trade credit insurance and protect your company’s fiance in the B2B industry, contact Red Asia Insurance.