February 8, 2022
Guide To trade credit insurance
If customers who owe money on products or services fail to pay their debts or pay them earlier than the terms allow, trade credit insurance covers businesses. It provides businesses with the security to offer credit to new customers and allows them to access funding at lower rates. Trade credit insurance covers products and services due within 12 months.
Companies trading in the UK and internationally can get coverage. Trade credit insurers also help customers manage risk by offering guidance and advice on credit risks and new markets that will help them grow. Trade credit insurance can be purchased by businesses for either their entire customer base or individual accounts.
Trade credit insurance protects the business from political and commercial risks. They also know that they will pay any money that is owed to them. This insurance helps businesses grow profitably and supports them at every stage of their business cycle. It also minimizes the risk of unplanned customer insolvency.
Two types of risk are generally covered by trade credit insurances.
Commercial Risk – The risk that customers cannot pay outstanding invoices due to financial reasons (e.g. declared insolvency, protracted default).
Political Risk – Non-payment due to events beyond the control of the policyholder/customer, such as wars, revolutions, natural disasters (earthquakes and hurricanes), or economic difficulties (such as currency shortages that prevent them from transferring money owed to one country to another).
All businesses can get trade credit insurance, regardless of their size. This includes SMEs as well as large corporations and international companies in any sector that provides goods or services on credit terms.
There are many types of products available, each with different benefits.
Types of trade credit insurance
Flexible products are offered by credit insurance providers to meet the specific needs of each business. The policies are tailored to meet the needs of each policyholder and offer a variety of options.
A comprehensive policy can cover a business’ entire portfolio, ensuring that there are no risks to both domestic and international transactions.
Options that only provide coverage for key buyers: either individually or in conjunction with a smaller group of key risks.
Trade credit insurers have a growing market to supply businesses with very specific needs.
There are many types of credit insurance policies that will suit all business needs.
Single risk/Buyer A policy that only covers one risk- This policy covers a specific market risk such as an extraordinary transaction relative to the customer’s total book of business or delivery of capital goods. It is also applicable if the cover is required by the bank to finance the transaction.
Export A policy specifically for exporting companies. It provides additional coverage for risks such as new import restrictions or war, inconvertibility, exchange, and other potential hazards that could arise from the buyer’s actions or those of a third-party government.
Multinational -A policy that covers multinational groups or the entire world under the same conditions regardless of where the business units are located.
Policy to Protect against Political Risk This policy covers inconvertibility, exchange failure, contract cancellation (for example by civil war), contract frustration, and import and export restrictions.
Excess Loss A policy that covers exceptional losses beyond the normal level- It sets an aggregate loss for the entire policy period. This policy is also known as “Catastrophe insurance” and protects the Policyholder from major buyers’ defaults.
What Does Trade Credit Insurance Cost?
A trade credit insurance policy’s cost will vary depending on your business size, how many orders you process per year, your industry, and the trade partners you have. Although policies can be customized to your needs, the cost of a trade credit insurance policy will vary. However, companies with more customer debt are generally more expensive.