Trade Credit Insurance

What is Credit Insurance?

Credit Insurance provides a business with protection against the failure of its customer to pay their trade credit debts – i.e. money that is rightfully the business’s.

Such a debt can arise as a result of a credit-customer becoming insolvent (i.e. going bust) or because the customer simply fails to pay within an agreed credit period known as ‘protracted default’

The protection covers, as standard, goods sold and delivered, or services provided, but can be tailored to cover many other risks such as pre-despatch work-in-progress and binding contracts.

As well as the above ‘commercial’ risks, credit insurance can also protect against ‘political’ risk for those trading with foreign firms. Such risks include unexpected war or civil war, cancellation of the contract by the government of your customer’s country, or governmental regulations which prevent the export or import of goods.

Credit Insurance – Background

If a business fails to collect money from invoiced debtors on time (or at all), the following effects are likely to happen:

1. Problems with cash flow – A business may find it difficult to pay their own debts, purchase essential materials and even pay staff wages!
2. Self-financing – A business may have to finance the loss or late payment of a debt from their own turnover. This may mean a business with a high profit margin may have to increase their turnover significantly to make up for even the smallest amount of money.
3. Reduced competitiveness – A business suffering from bad debts may have no choice but to reduce the amount of credit they offer making them less competitive.
4. Collection & legal costs – If a business decides to take action to recover debts, this can often result in collection fees or solicitor fees. Alternatively, if the business decides to recover the debt themselves, the process can be timely.

Generally, if you offer credit terms to your invoiced customers you will increase your sales (the problem is you will also potentially increase your bad debt).

Trade credit insurance is designed to cover, usually for twelve months, a supplier of goods or a service from bad debt arising out of an act of insolvency with most credit insurance policies offering protracted default i.e. where they simply refuse to pay. All of your invoice based customers can be covered, or just your ‘top’ customers by way of size of debt (generally not just your worst customers as insurers prefer a balanced book!)

The trade credit insurance policy works by individual credit limits being attributed to your customers, known as ‘buyers’. The limits are pre-set, on your request, and you can trade within the credit limit throughout the year without further reference to the insurer. You can request an increase in the credit limit at any time.

Insurers tend to warn its clients if it receives notification if an insured ‘buyer’ is appearing to be in difficulty i.e. other clients are suffering late payments, or other sources have knowledge about the firm’s financial position.

Trade Credit Insurance premiums may be paid in one payment but many insurers offer monthly payment, usually interest free.

Many unforeseen and disruptive circumstances can appear in the world today. As we have seen of late, this is not confined to third world countries.

Covid was a great example no-one anticipated where debtor firms suddenly ran out of money and were unable to pay their debts.  The effect of high interest rates on the economy is another current issue affecting business and can affect debtors ability to pay.

War, political unrest, military coup d’état, fraud, and all the problems any business in the world can suffer makes export sales, without trade credit insurance, business suicide.

Firms wouldn’t even consider not insuring their buildings or contents/stock, nor indeed their liabilities, but they often fail to insure their other assets – debtors.

Why Use Credit Insurance?

It is important to see trade credit insurance for what it really is. A business tool which can be used pro-actively as a mechanism for securing further funding for business expansion, something which can help growth as a firm’s customers grow, and enable the company to take on new business with confidence and security.

Quotation Form – PDF version

or

Quotation Form – MS Excel version

Policy limits and exclusions may apply, please see policy wording for full terms and conditions.