Is one of your largest assets unprotected? Accounts receivable are often a business’s largest asset and directly affects cash flow and profitability. When left unprotected, they have the potential to put stress on your organization against nonpayment.

What is Trade Credit Insurance?

Trade credit insurance — also referred to as credit insurance, export credit insurance or accounts receivable insurance — is designed to protect businesses from nonpayment in regards to commercial and political risks that are beyond a company’s control. Policies protect against nonpayment when a buyer is insolvent or does not make the payment after an agreed period of time after the due date.

The Role of a Trade Credit Insurer

Beyond indemnifying losses as they arise, a trade credit insurer often provides services or tools to strengthen credit management practices. Examples of resources include:

  • Providing proactive monitoring of a business’s customers to evaluate continued creditworthiness
  • Current country reports including potential risks for conducting business in a foreign market
  • Managing outstanding receivables using complex financial solutions
  • Procedures for proactive debt collection

Are There Different Trade Credit Policies?

Yes, there are typically three types of trade credit insurance policies:

  1. A whole turnover policy includes all buyers and insurers against nonpayment. A business can typically choose to insure all domestic sales, all export sales or both.
  2. A key account policy insures a business’s key accounts only
  3. A single buyer policy provides a business insurance coverage for accounts receivable for only one of its clients. Typically, this is used when a business has a disproportionate amount of exposure through one large client.

These are the standard policies available; however, there are additional policies available for transaction-by-transaction basis. This typically is appealing for business’s with limited transactions.

Setting Credit Limits

Credit insurers evaluate the business’s customers during the underwriting process and determine a credit limit for each customer. These credit limits can change during the policy period, typically due to a deterioration in the customers’ credit. However, credit limits may also be requested to be increased due to new demand. The insurer will review any new customers’ or new credit limit requests and approve or deny them during the policy period.

The Benefits of Trade Credit Insurance

  • Improved Sales: Business with trade credit insurance can boost their sales by offering customers and prospects more favorable credit terms while eliminating the need for costly letters of credit.
  • Access to New Markets: Trade credit insurers offer protection against unique export risks by providing businesses with the market knowledge needed to make informed decisions in foreign markets.
  • Insolvency Protection: In regards to sales made on credit terms, trade credit insurance protects organizations from the risk of a customer default or insolvency.
  • Cash Flow Relief: Trade credit insurance provides cash flow relief when a business’s customers become insolvent or do not pay their bills on time. Losses can be indemnified, allowing the business to maintain its cash flow.
  • Reduce Concentration Risk: Trade credit insurance mitigates risks for businesses whose bottom line is dependent on a select number of customers.
  • Accounts Receivable Support: Trade credit insurers offer businesses access to professional trade credit analysts who can share best practices with a company’s credit department.
  • Collection Services: Trade credit insurance provides access to cost-effective collection services.
  • Facilitate Bank Financing: Banks will typically offer more favorable lending terms to businesses that insure their accounts receivable.
  • Portfolio Monitoring: Trade credits insurance also provides access to professional portfolio monitors who track customers’ ability to meet their financial obligations to the insured business.

Trade credit insurance is an important component of comprehensive coverage, especially for any business that sells services or products on credit. To learn more about how trade credit insurance can benefit your organization, connect with us today.

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