Would you take a near guarantee that your company can collect outstanding payments from customers? That’s what trade credit insurance can do for your business: safeguard your company from certain losses from unpaid business debt.
Extending credit to allow commercial customers to purchase your goods and services can boost business. Accounts receivable can make up 10-30% of a company’s total assets. Companies with accounts receivable generally are considered to be in good shape. However, the lifeblood of any business is cash flow, and IOUs aren’t cash.
Holding accounts receivable shows you are doing business, but it also represents a risk that your customers might not pay what they owe. Trade credit insurance can help take that risk off your worry list.
Here’s a look at what trade credit insurance is and why you might consider it for your business.
Explaining Trade Credit Insurance
So what is trade credit insurance used for, and how can it protect you?
Trade credit insurance is a way to safeguard your company against commercial customers not being able to pay for products and services they’ve already received. |
The insurance policy pays out if a company that owes you money fails to pay. An insurer also may pay in the case of severe late payments.
Trade credit insurance is typically extremely customizable and considers the number of customers, their size and creditworthiness, and the industry in which they operate. You can take out a policy on your largest customers, all your customers, or a single customer.
Trade credit insurance is available for clients based in the United States or those headquartered in foreign countries. You can purchase it through private insurersProperty & Casualty Agent. Alternatively, the Export-Import Bank of the United States offers coverage for sales with foreign-based companies.
You also might hear trade credit insurance called accounts receivable insurance, debtor insurance, and export credit insurance.
How Does Trade Credit Insurance Work?
The amount of coverage you receive from trade credit insurance is based on the creditworthiness of your buyers. An insurer evaluates the accounts receivables you want to cover and assigns a credit limit to each of your customers. This is your coverage limit for each buyer.
A claim on trade credit insurance is triggered when customers can’t pay what they owe because of bankruptcy, insolvency, or some other legal situation. Other reasons to pay out could include political unrest, government requirements of foreign businesses, or protracted default.
The following proceedings and actions can trigger a claim:
A court appoints a receiver for a customer’s business
A customer makes a collective arrangement with creditors
A court takes protective custody of a company
A company begins insolvency proceedings
A company begins proceedings to liquidate
A payout can take some time because of how long it takes to write and process a claim. If a claim is approved, trade credit insurance pays a percentage of the accounts receivable, typically 75% to 95%. The amount could be higher based on the coverage you purchase.
Example: You purchase a trade credit insurance policy, your customer is evaluated, and the insurer sets a credit limit. The customer files for bankruptcy before the year is up. If your insurer offers debt collection services, the insurer may try to collect the debt through the court-appointed receiver or liquidator. If that fails, you can file a claim, and the insurer may pay out a percentage of the account receivable. |
What Is and Isn’t Covered by Trade Credit Insurance?
Trade credit insurance is designed to cover short-term accounts receivables — ones typically paid in 12 months or less — from a business-to-business transaction.
Trade credit insurance covers unpaid debt from:
Bankruptcy
Insolvency
Extensive defaults
Political risks
Climate-related events
Currency restrictions
Trade interruptions
Export and import regulatory changes
However, trade credit insurance doesn’t cover all your outstanding debt.
Here are issues and scenarios trade credit insurance doesn’t cover:
Non-payments caused by disputes
Any indirect trade with a customer
Countries not listed in the policy
Receivables owed by certain companies or individuals
Losses from sanctioned companies or individuals
Trade credit insurance also will not cover accounts that are a high credit risk.
The Benefits of Trade Credit Insurance
With trade credit insurance, you can grow your business and better compete with companies by extending credit to customers and venturing into new markets.
Trade credit insurance can create or bolster business opportunities, including mitigating bad debt from customers, helping maintain cash flow, increasing sales by extending more credit, and improving access to funding.
Trade credit insurance can also play a key role in your company’s credit management. Having a policy can give you confidence that payments will be made on time, you are keeping the costs of credit down, and any poor debt is being managed without damaging your relationship with your customers.
