The Ins and Outs of Trade Credit Insurance

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    Over time, businesses will enter into credit agreements with their clients where payments for products or services rendered by the businesses will only be required after an agreed period of time. The means to ensure that the amount from these outstanding payments is realised by the businesses is called trade credit insurance. Businesses will seek trade credit insurance particularly for clients who manage their credit poorly, as they are at higher risk of not paying on time for services rendered or goods purchased.

    The protection you obtain with trade credit insurance against non-paying customers is structured such that it is tailored to forecast the businesses monthly cash flow. Business, however, can also utilise trade credit insurance solely for the purpose of protecting all of its invoices as a built-in invoice finance tool or protecting only some of its invoices.

    Types of policies

    Since trade credit is the norm with a number of businesses, it stands to reason that trade credit insurance has gained much popularity over a plethora of industries.

    The following are the different types of policies:

    • Whole turnover cover
    • Specific cover for either one customer or a group
    • Risk management for export or multi-national businesses

    How does trade credit insurance work?

    Once the business has completed its application for trade credit insurance, the application will be processed by the underwriter who will assess its risk level prior to quoting it. Actuarial techniques are employed by underwriters that help them asses the business’s trade industry, its client’s credit history, past unpaid invoices and more.

    This analysis will enable the underwriter to determine each business’ credit limit that the insurance will be used to protect, meaning that the cover cannot stretch beyond the amount specified. There are some cases however, where the cover amount detailed by the trade credit insurance will only cover a percentage of the total.

    Additional benefits

    Added to invoice cover, trade credit insurance also gives businesses a more in-depth analysis on their loan repayment reliability. This information is valuable to management as they are able to make more informed decisions on the business’ grow objectives. Yet another valuable benefit is the fact that businesses also gain legal aid that can be used for the successful recovery of debts.

    What is export credit insurance?

    Popular amongst businesses involved in international trade, export credit insurance protects against certain elements such as the regulation of customs, impediments in the supply chain and/or political unrest may also stunt the business’ revenue. In some countries it may also be difficult for businesses to gain access to the financial status of the businesses that they are in trade relations with or reasons that could slow down payments; this is where export credit insurance comes in. 

    Political risk cover

    This particular cover focuses on cash flow delay for businesses that are caused either by restrictions on fund transfers or bankrupt government clients. Political risk insurance protects businesses against delayed payments caused by political unrest, the ceasing of assets in foreign countries or any other risk that may be caused by threats from a foreign government.

    The price for credit insurance

    Credit insurance costs will typically be determined by the nature of the business’ chosen cover agreement which will include the amount that they are insured for along with the business’ potential risks. Monthly insurance payments will therefore be determined by a percentage of the invoice amount that is being covered for, which can be from as little as 0.15% of the amount insured. The premiums will often increase from business to business depending on the poor health of a business’ credit history and/or other negative factors. 

    Why choose trade credit insurance?

    The following are factors that businesses need to consider around trade credit insurance:

    • How would an unpaid invoice impact a business’ cash flow due to a client becoming bankrupt or if for some other reason they do not pay?
    • What is the business’ financial health? Would they be able to continue to operate without payments of a particular invoice?
    • What are the growth projections in the industry that the business is operating in?
    • Are there elements that the business has little or no control over that could impact on their clients’ ability to pay such as market forces or changing culture?

    Who qualifies for credit insurance?

    Credit insurance would typically suit medium to large businesses even though Small to Medium Enterprises (SMEs) are able to access the same. Most businesses that operate in a volatile industry would consider credit insurance as a primary option. According to the Association of British Insurers (ABI), this particular insurance type is most popular amongst businesses in the United Kingdom as 75% of them will opt for it, while the remaining 25% will only use it for protection against any cash flow delays when it comes to international dealings.