What is Trade Credit Insurance?

Trade credit Insurance

Trade credit insurance is useful if a customer fails to pay, trade credit insurance safeguards your business. In many instances, credit insurers may cover up to 90% of the debt.

Insurance coverage usually applies to customer bankruptcy and political risks, although it can extend to many other causes of non-payment as agreed in the policy terms. It gives a business that safety net just in case a customer cannot pay for a large order and decreases the risk of a large financial loss. Losing a payment from a large order or a big product can set back a business and is a large risk to the cash flow.

With trade credit insurance, the policyholder knows their business is protected against both commercial and political risks that are beyond their control knowing that money owed to them will be paid.

  • Commercial Risk– the risk that customers are unable to pay the outstanding invoices because of financial reasons.
  • Political risk– non-payment as a result of events outside the policyholder or customer’s control, due to political events (wars, revolutions),natural disasters,  or economic difficulties so are unable to transfer money owed from one country to another.

What is covered?

Trade Credit Insurance covers:

  • If the business does not receive what you are owed due to a buyer’s bankruptcy
  • Customers is facing insolvency
  • If payment is very late

The insurance policy will reimburse the business for most of the outstanding debt. This will help protect its capital, maintain the cash flow and secure earnings.

What should you know?

A  trusted customer can stop paying at any time and customer behaviour can be very unpredictable. That’s why trade credit experts advice firms to invest in trade credit insurance when business is good so that when a problem does arise, they don’t have to go through all the financial problems and risks.

Trade credit insurance is available to businesses of all sizes, from SMEs to large corporates and international businesses across any industry that supplies goods or services on credit terms. Many businesses agree that trade credit gives them the confidence to grow their business and customers database with low risks.

Types of Trade  Credit Insurance

  • Single Risk/Buyer – A policy that covers a single risk. This policy is relevant if the policyholder is exposed to a particular market risk, such as a large transaction  or a delivery of capital goods, or when cover is demanded by the bank financing the transaction.
  • Export – A policy that is specifically designed for exporting companies, and provides additional cover for a range of risks such as new import restrictions, war, inconvertibility of exchange, that may arise as a result of the actions of the buyer or a third party government.
  • Multinational – A policy that provides multinational group-wide or worldwide cover under the same conditions, irrespective of the location of the business units.
  • Political Risk – A policy that covers inconvertibility of exchange, contract frustration (for example, by civil war), contract cancellation, import and export restrictions, etc.
  • Excess of Loss − A policy that covers for exceptional losses over and above the normal level of bad debt by setting an aggregate first loss for the whole policy period. It is sometimes referred to as a “Catastrophe policy” aiming to secure the Policyholder against the failure to pay of major buyers
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