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. It gives businesses the confidence to extend credit to new customers and improves access to funding, often at more competitive rates.No matter how careful you are, your customers can sometimes fail to pay. Unless you demand payment up front or are covered by credit insurance, this makes you vulnerable to bad debt. Can your business afford a bad debt? Credit insurance protects your cash flow. It covers your trade with your customers, so that you still get paid even if they go under or fail to pay you.
Trade credit insurance works by insuring you against your buyer failing to pay, so every invoice with that customer is covered for the insurance year. It’s used by businesses of all sizes to protect both international and domestic trade. Businesses also use credit insurance to help them secure finance and working capital with banks, explore new markets with confidence and attract new customers with favourable credit terms.
As with all types of insurance, there is no one size fits all approach. The level and cost of your credit insurance will be dictated by your needs. For example the size of your credit portfolio, level of risk associated with your customers and location of your market will be unique< to your business. Most insurance solutions will therefore be tailored to your requirements.
Trade credit insurers will generally cover two types of risk that a business can include in their cover:
- Commercial risk – the risk that your customers are unable to pay the outstanding invoices because of financial reasons, for example, declared insolvency or protracted default.
- Political risk – non-payment as a result of events outside the policyholder or customer’s control, for example due to political events (wars, revolutions); disasters, (earthquakes, hurricanes); or economic difficulties, such as a currency shortage so are unable to transfer money owed from one country to another and regulation from the government to stop the transaction between country .
Object of Insured
Objects that are covered are accounts receivable relating to the goods/services sold domestically and export with futures.
Type of Policy
- Export – A policy that is specifically designed for exporting companies, and provides additional cover for a range of risks such as new import restrictions, war, inconvertibility of exchange, that may arise as a result of the actions of the buyer or a third party government.
- Multinational – A policy that provides multinational group-wide or worldwide cover under the same conditions, irrespective of the location of the business units.
- Political Risk – A policy that covers inconvertibility of exchange, contract frustration (for example, by civil war), contract cancellation, import and export restrictions, etc
- Resulting from any avoidance by an Insured Buyer of a contract concerning goods because such contract is void, illegal or unenforceable or because of a repudiation of such contract by the Insured Buyer,
- Which relates to sales tax, GST, retention monies, interest charges, penalties, government charges and taxes and any consequential damages or costs;
- Relating to or arising from any transaction involving the transfer to or from goods to be held or held on a consignment stock basis by the Insured Buyer or the Insured Buyer’s Agent; unless has before hand agreed in writing, subject to specified conditions, to cover goods drawn out of consignment and the Insured has complied with such specified conditions;
- Relating to or arising from any “pay when paid” contracts or any other agreements to sell to a person or entity who is not unconditionally and irrevocably bound to pay a purchase price as agreed before hand (eg goods delivered on a “sale or return basis” or goods delivered on a “commission basis” to a commission agent)
- Relating to goods Delivered to an Insured Buyer at a time when a Notifiable Event (other than a Notifiable Event arising solely as a result of the Insured Buyer withholding payment on the basis of a bona fide documented dispute) exists in respect of such Insured Buyer;
- Which is subject to any form of dispute;
- Relating to any transactions that are in the nature of personal or consumer transactions as opposed to business or commercial transactions;
- Directly or indirectly caused by political risks such as war, invasion of, or acts by foreign enemies, hostilities, rebellion, revolution, confiscation, nationalisation, insurrection or military or usurped power, or due to the order of any government, public or local authority or by any restrictions on trade transfers; or
- Directly or indirectly caused by risks from atomic energy risks, employing the process of nuclear fission or fusion or handling radioactive material including, but not limited to the use of nuclear reactors; the use or handling or transportation of radioactive materials; or the use, handling or transportation of any weapon of war or explosive device employing nuclear fission or fusion
Benefit of Trade Credit Insurance
Protecting your accounts receivable from potential bankruptcy is only part of the benefit this type of debtor insurance can provide. In addition to protecting your business from the risk of insolvency, it can help:
- Grow your customer base as potential buyers may be attracted to your credit terms
- Enhance trade providing you with the confidence to develop and expand your market
- Guarantee cashflow enabling you to build strong relationships with your suppliers and employees
- Safeguard customer relationships through improved communication and enhanced credit terms
- Improve your access to finance and your relationship with your bank
- Meet the risk management requirements of your stakeholders or board and provide peace of mind
You might be able to use credit insurance as a tax-deductible business service. It can be a requirement of your management board and you might find it a great asset when seeking finance from banks. Credit insurance is suitable for all businesses, from SMEs to large multinationals.
Who need TCI?
Any company which is currently selling or has a potential to sell its products / services to other companies on Open Account / Credit Terms, or looking at expanding into new markets, or seeking bank financing
The Cost of Your Trade Credit Insurance
The cost of your trade credit insurance policy will vary depending on your industry, your annual revenue that needs to be insured, your history of bad debts, your current internal credit procedures and your customers’ creditworthiness, among other factors and buyer information.
If you sell to clients in a mix of industries and countries, your trade credit insurance rates will reflect the risk determined to be associated with all of them
Minimum Data Requirement
Your insurer will assess the risk based on:
- Trading history
- Your customer ratings,
- Credit terms,
- Loss history or debt,
- Business sector,
- Customer information such financial report or interview and
- Factors such as the need for non-cancellable credit limits or whole turnover cover.
- Completed claim form
- Copies of invoices, purchase orders and sales contracts
- Copies of proof of delivery
- 12-month ledger history (in Excel if available)
- For insolvency: Court notices and, if available,
- Copy of the Proof of Claim filed with the court
- For protracted default: All correspondences that substantiates the steps taken to minimize the loss