A Guide to Trade Credit Insurance

A Guide to Trade Credit Insurance

Credit insurance is something that many businesses need as it is coverage that protects businesses from not being paid from commercial debt. It ensures that invoices are paid and encourages businesses to manage commercial or political risks of trade that are out of their control. It makes sure that:

  • Capitol is protected
  • Cash flows are maintained
  • Loan Servicing and repayments are enhanced
  • Earnings are secure

Commercial credit insurance can be a great investment for certain businesses, but for some, it may not be a viable investment option. For businesses that sell to governments or retailers, your cover is not liable as trade credit insurance only covers B2B accounts. Trade credit insurance allows organisations to feel secure when giving credit to customers or larger potential customers. The protection allows a business to grow as it allows them to increase sales. This should not be mistaken as a substitute for being prudent with finances. Well managed credit and finances should be the foundation of your business. 

Benefits of Trade Credit Insurance 

Trade credit is a very powerful tool commercially as it can be used to position in new markets and build loyalty with customers. Trade credit also helps with working capital and cash flow as it can help to control the risk of credit. Trade insurance ensures that you are compensated for bad credit which means that working capital improves and uncertainty regarding cash flow falls. 

Trade credit insurance also:

  • Allows you to improve the average number of days it takes to receive a payment after a sale. 
  • Allows you to manage operations and investment and secures growth.
  • Offers peace of mind to financial partners including key shareholders.
  • Protects and accelerates the development whilst also controlling risks on your cash flow.

Companies invest in trade credit insurance for a number of reasons including:

  • Sales expansion 
  • Expansion into new international markets
  • Better financial terms
  • Reduction in bad-debt reserves
  • Actionable economic knowledge 
  • Protection against non-payment and catastrophic loss
  • Increase in sales and profits
  • Improved lender relationship

What does Trade Credit Insurance Cover?

Trade credit insurance protects businesses from bad debt that has not been paid by your customers and covers your business to business accounts. If a business does not receive a payment that it is owed due to a purchaser’s bankruptcy, insolvency trade credit insurance will pay a percentage of the debt owed so the business is not at a complete loss. This in turn helps to protect capital as well as secure earnings and extend competitive credit terms for better financing opportunities. 

What types of Trade Credit Insurance are there? 

There are four main types of trade credit insurance and the cost of the policy will vary pending on the type of cover you choose, the industry you are in, the business annual revenue that needs insuring, history of bad debt amongst other factors. 

  • Whole Turnover: This type of trade insurance cover will protect a business against commercial debt from all customers that haven’t paid their repayment. A business can also decide whether the cover applies to all domestic or international sales or both. 
  • Key Accounts: With this insurance type, a business can decide to only insure its largest customers whose non-payment will cause detrimental effects to the business.  
  • Single Buyer: Single buyer coverage is for those businesses where they have a key customer who has most of the transactions with them. This protects against potential default from that customer.  
  • Transactional: Transactional is a type of credit insurance that protects against transaction to transaction basis. This is for businesses who produce few sales or only have 1 customer.

What Is Not Covered By Trade Credit Insurance?

Trade credit insurance only covers business to business accounts that are receivable from commercial and political risks. If a business has outstanding debts, these are not covered unless there is a trade with the business and another business. 

There is much to learn about trade credit insurance and can be a powerful tool for commercial purposes which will, in turn, help a business secure better financing, dominate new markets, maintain cash flow and help key stakeholders feel secure when investing in markets. If you are looking at getting trade credit insurance it is always best to speak to a professional regarding your personal preference as this can be difficult to navigate through if you don’t know what you are doing.