Getting paid on time is one of the best news for any company in the business-to-business industry (B2B). Most B2B businesses provide their product or service to clients or customers on trade credit bases. Trade credit payments entail a company providing products or services first and then receiving payment after on a set date.
Extensions can help clients, but when the payment is still not received; it becomes a problem. Non-payment or late payments can cause severe financial issues and may disturb the future of the providing business.
Businesses that work through trade credit payments should purchase trade credit insurance. The insurance will cover the loss and help the company move forward. The insurance is crucial, as any client, old or new, can suddenly avoid paying and contribute to balance sheet problems.
Purchasing trade credit insurance is already the right step. Additionally, it is important to understand the trade credit insurance process and know which client needs to be covered. Hence the article will explain trade credit insurance and the process of submitting a claim.
What Is Trade Credit Insurance?
Trade credit insurance financially protects a business from non-payments or late payments due to commercial or political risks. The insurance will reimburse a large portion of the financial loss.
Commercial risks include insolvency & bankruptcy, while political risks include wars, government issues or sudden trade restrictions. The economy and political climate is always unpredictable and can indirectly affect any business.
Policyholders can either cover all their clients or certain clients. The insurance company can also examine each client and provide a specific risk rating. For example, a client for a politically unstable country may be considered high risk and may cover shorter durations of non-payments.
However, the trade credit insurance process is not as simple as many other insurances, and claims may take longer. The below steps will help policyholders understand why each stage is vital, although the steps may differ slightly depending on the insurance provider.
Trade Credit Insurance Claim Process
Observe Deadlines
Before considering the trade credit insurance process – a business must provide products or services and invoices to a client (invoice date). Most companies expect clients to pay on the invoice date. However, in the b2b industry, it is common for a payment to be on credit terms, 30, 60 or even 90 days (depending on the relationship).
Trade credit insurance providers typically mention that a business should be concerned if credit terms are not respected i.e. 90 days, and the business still isn’t paid. Hence, the company must observe each client’s payment patterns and closely monitor late payments.
A casual email can be sent as a reminder as soon as the payment is late. A week late can quickly become months, leading to loss and disruption. Therefore, each payment is important to profit and reinvest in the business.
Make all Efforts Retrieving the Payment
Taking the example of 90 days. When it’s been almost 90 days (due date), and more products have been sent- it’s time to take the late payment seriously and put in more effort retrieving the amount.
The business should communicate the importance of getting the payment back during an extension period. Professional communication is the first part of the trade credit insurance process. The insurance will not accept a claim if the policyholder has not tried to retrieve the credit payment.
Additionally, the communicating team should make notes of each call, conversation and make copies of emails for a possible claim. These documents also can be provided as supporting documents when submitting a claim form.
Businesses could be lucky and receive their payment or agree on a stage payment plan. However, if the outcome isn’t positive, the business will not need to stress too much if the client is covered under the trade credit policy.
Stop All Deliveries
After all the attempts and the extension period, if the efforts have resulted in no payments- the business must pause all delivery of products and services (state of default). This part of the trade credit insurance process should be around 120 days after the initial products/service have been delivered (invoice date).
The additional 30 days onto the 90 are the maximum extension in case the client does send the payment. After the 120th day (in our example), the client should formally be informed the business will not provide any more products or services until all payment is made.
This stage aims for clients to understand they will lose the products or services, which may be necessary to the client process. For example, a food business may not be able to run without packaging materials. The fear of losing a part of their process may force them to pay or set up a plan.
The policy-holding business needs to focus on its financial health over B2B relations, no matter the client.
Inform Trade Credit Insurance Provider
No business should have to deal with financial loss when they have provided the requested product or service. Therefore if there is no sign of payment after all efforts, the business must contact the trade credit insurance provider.
The provider can be contacted earlier too, for advice and payment retirement methods. However, after 120-150 days, the claim process submission can begin. The insurance company will check if the policy includes the client and if the business has done enough. They can also instruct on future steps and advice on ensuring the claim is successful.
Informing the credit insurer is the most important part of the trade credit insurance process.
Submit Claim Form
The business must submit the claim form and documents before it’s too late. The last day to submit the claim form is usually the 150th day (depending on specific policy) from the invoice day. Many insurance claims are not accepted due to late submission.
Each claim form has to be submitted with supporting documents, such as email copy, past invoices, client information and other requested documents by the insurance provider. These documents and details in the form can help the insurance agents understand the situation and the client.
After submitting an adequate claim form with the requested documents, the business can slightly relax and let the insurance company and experts do their work.
Insurer Contacts and Examines Client Details
After the form is submitted, the insurers will review the client and situation. Then, the insurance company will check if the insurance can cover the reason for non-payment. The insurers will then contact their experts and try to retrieve the payment from their side.
They will examine why the company cannot pay and try their best to set up a payment strategy that will benefit both parties. This point of the trade credit insurance process is known as the waiting period.
The insurance will use all methods to contact the client and look into their financial status. If the company is insolvent or political risks are not going to improve- there will be no waiting period, and the insurance will immediately process the claim.
The waiting period typically lasts 120 days; if there is no positive outcome, the last day is the date of loss.
Insurance Reimburses Trade Credit Claim
The final stage of the trade credit process is what a company has been hoping for and is the main benefit of the insurance. Within a month after the date of loss, the insurance will reimburse the portion of the non-payment. The exact percentage depends on the policy and the amount of financial loss but ranges between 75-90 %.
The reimbursement is a great opportunity to reinvest the funds into the business as planned. The process also teaches B2B industry businesses to be more aware of such issues and choose clients carefully.
At the end of the trade credit insurance process, there will still be a loss, but with insurance, a large amount returned is still better than a large amount lost.
Why Trade Credit Insurance Is Crucial for B2B Companies?
Trade credit insurance is a must for any business that receives payment through credit terms. No matter how big the client is, any client can be affected by commercial or political risks and may be unable to pay their dues.
The insurance is more than a safety net; the insurance begins its process even before a claim with client examinations. As a result, client examination can help businesses be more aware of high-risk clients, which can avoid future losses.
The trade credit insurance process can help a business either retrieve the whole amount or reimburse the portion. Either way, the insurance will ensure the policyholder is financially stable and protected.
With trade credit insurance, policyholders can focus on providing the best product or service and avoid stressing when payment is late.
To learn more about trade credit insurance and protect your company’s fiance in the B2B industry, contact Red Asia Insurance.
