Buying on credit is an essential part of today’s business world. From the average private consumer to our federal government, the ability to use credit as a means to buy today and pay later is a critical function of the economy. For companies, extending credit to customers and taking advantage of credit with their suppliers is simply the way they do business.
But what happens if a customer who has been granted credit never pays? What if the client goes bankrupt? In order to protect you from a situation where your business faces financial loss from a customer who does not pay on credit, businesses often make use of Trade credit insurance.
However, there are a lot of controversies surrounding trade credit insurance policies. Many claim it’s no longer effective, others say it is still in operation. Let’s find out in this article if trade credit insurance still works.
What is Trade Credit Insurance?
Trade credit insurance provides cover for businesses if customers who owe money for products or services do not pay their debts, or pay them later than the payment terms dictate.
Commercial credit insurance provides coverage to companies when customers who owe money for products or services do not pay their debts or pay later than prescribed in the payment conditions.
It gives businesses the confidence to extend credit to new customers and improves access to finance, often at more competitive rates. Trade credit insurance is for products and services that expire within 12 months.
According to government statistics, there were more than 17,000 new insolvencies in 2019
Coverage can be obtained from companies operating both in the UK and internationally, and in addition, credit insurers help their clients manage risk by providing guidance and advice on credit risk and new markets to help companies to expand. Companies can purchase commercial credit insurance for their entire client portfolio or individual accounts.
With business credit insurance, you know that your business has protection against commercial and political risks that are beyond your control, knowing that you will receive your money. This helps companies grow profitably, supports them at all stages of the business cycle, and minimizes the risk of unexpected customer insolvency.
How much does Trade Credit Insurance Cost?
The cost of trade credit insurance depends on a number of factors, including the industry in which your business operates, the financial history of your business, the type of policy you choose, and the risks covered.
Another important factor that insurers take into account is the financial strength of their clients. Insurers analyze the creditworthiness of each client and assign a credit limit to each client. This is the amount that the insurer is willing to cover and this limit may change depending on the new information the insurer receives about the client. Limits are typically removed or canceled as a result of events that reduce a customer’s financial viability.
Types of risks that a business can include in its coverage
Business credit insurers typically cover two types of risks that a business can include in its coverage:
Business Risk – The risk that your customers will not be able to pay outstanding invoices due to financial reasons, such as bankruptcy or long-term default.
Political risk: non-payment due to events beyond the control of the insured or the client, for example, due to political events (wars, revolutions); disasters (earthquakes, hurricanes); or economic difficulties, such as a shortage of foreign exchange, so the amounts owed cannot be transferred from one country to another.
In 2019 alone, ABI members supported business income of over £ 366 billion by providing business credit insurance.
Business credit insurance is available to businesses of all sizes, from SMEs to large corporations and international companies in any industry that provides goods or services on credit.
There are different types of products available for each type of business, covering both domestic and export trade.
Types of Trade Credit Insurance
There are many different types of credit insurance policies to meet the needs of all businesses:
Single / Buyer Risk
A policy that covers a single isolated risk. This policy is relevant if the insured is exposed to certain market risks, such as an exceptional transaction in relation to the value of the client’s total portfolio, or the delivery of capital goods, or if the coverage is requested by the bank that finances the transaction.
A policy specifically designed for exporting companies that provides additional coverage for a variety of risks, such as new import restrictions, war, irreversible trade, that may arise as a result of the actions of the buyer or a third party government.
A policy that provides global or multinational group coverage on the same terms, regardless of the location of the business units.
A policy that covers irreversible barter, contract frustration (eg civil war), contract cancellation, import and export restrictions, etc.
A policy that covers exceptional losses above the normal level of bad debt by determining a first aggregate loss for the entire policy period. It is sometimes called a “catastrophe policy,” designed to protect the policyholder from not paying large buyers.
For companies involved in the sale of goods and services, especially those that sell internationally, trade credit insurance can be a useful tool to protect against customer default in the event of customer bankruptcy or insolvency, long-term default, or political risk.
These risks are difficult for entrepreneurs to predict, and trade credit insurance provides the financial safety net that allows you to grow your business without worrying about uncontrollable events.
Particularly for smaller businesses, business credit insurance can help you use your capital more efficiently, while also providing the expert services of a reputable insurer to strengthen your credit management practices.
Read Also: Importance of Business Credit Insurance