Trade credit insurance is a method of protecting your accounts receivable (invoices) from non payment.
It is an increasingly popular form of protection against customers which either refuse to, or cannot, pay their debts.
Let’s find out how it works
What is Trade Credit Insurance?
Trade credit insurance, sometimes called ‘bad debt protection’, is an insurance cover for businesses against customers who don’t pay their debts.
While safeguarding against customer insolvency, credit insurance is specifically designed to project a company’s working capital cycle.
It can be used as a standalone product covering the entire company accounts receivable; as a bolt on for invoice finance; or to cover a particular portion of a company’s invoices, for example those from exports only.
Types of Trade Credit Insurance
Trade credit insurance is now a popular field with different solutions tailored to different segments of the market.
It is possible to choose:
- Whole turnover cover
- Specific cover for a single customer or group of customers
- Risk management for multi national / export business
How Does Trade Credit Insurance Work?
After your application the underwriter will assess the level of risk before giving you a quote.
Underwriters use what are called actuarial techniques (statistical assessment of risk in insurance) to look at the sector of trade, the credit history of the companies involved, previous bad debt experience and a number of other factors.
Based on this analysis, the underwriter will establish a credit limit for each company to which the credit insurance will apply. That means that they cannot owe you any more than this specified maximum amount and the cover still remain valid.
In some instances this may not cover the total amount of the trade but a percentage only.
In addition to its basic protection, credit insurance has the added value of offering insight into the credit-worthiness of your customers. This may allow you to make smarter strategic decisions as you grow the business.
Most insurers also offer legal assistance via their own teams to help recover debts, which can be very useful.
Trade Credit Insurance for Exports
Dealing with customers in other countries obviously brings with it its own specific risks. The flow of money may be slowed by customs or supply chain delays, and there are sometimes specific political situations which place extra risk upon commercial situations.
Depending on the country it may also be more difficult to assess the foreign clients financial status, or indeed the instances which could delay payment.
For this reason export credit insurance is a popular segment of the credit insurance industry.
Political Risk Cover
This is offered by some trade finance specialists covering the potential delays to payment which might come from money transfer restrictions, or the insolvency of a government buyer.
Our political risk insurance helps businesses to protect their overseas investments in situations such as political violence or confiscation of assets, or other risks pertaining to the actions of a foreign government.
How much does Credit Insurance Cost?
The price will depend on the nature of the cover you need, how much you’re insuring and the potential risk for the insurance company.
The premium is calculated as a percentage of the total amount of revenue being insured, starting from around 0.15% of insurable turnover. In some cases it does work out much higher than this if there is imperfect credit history or other red flags.
Is Trade Credit Insurance Worth it?
As with any type of insurance, there is a calculation to be done around risk. You’ll need to assess:
- What are the financial implications of a client become insolvent or failing to pay you.
- How solvent or financially stable are your clients
- How volatile is the industry in which you’re working
- Are their factors beyond your control such as market forces, or a changing culture which could impact your clients ability to pay?
If you conclude that non-payment from a major client could seriously jeopardise the stability of your own business then credit insurance is likely to be a wise choice.
What Type of Business Uses Credit Insurance?
While there are policies available for SME’s, it tends to be medium or larger businesses who opt for credit insurance.
It is particularly popular in industries with historical volatility.
The Association of British Insurers (ABI) reports that just under 75% of credit insurance is taken by businesses operating solely in Britain, while the the remaining 25% use it for international trade protection.