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.
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 Policy
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 it 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.
Export Credit Insurance
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, 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.