Trade credit insurance as it is also know is a method of protecting your accounts receivable (invoices) from non payment.
It is an increasingly popular form of protection against customers which either refuse to, or cannot, pay their debts. While safeguarding against customer insolvency, credit insurance is specifically designed to project a company’s working capital cycle.
It can be used as a standalone product covering the entire company accounts receivable; as a bolt on for invoice finance; or to cover a particular portion of a company’s invoices, for example those from exports only.
Trade credit insurance’s main purpose is to protect your business if a buyer fails to pay but the first point about how much of a hit you could take is more complicated than it seems.
How Does Trade Credit Insurance Work?
After your application the underwriter will assess the level of risk on your client base before giving you a quote. Underwriters use what are called actuarial techniques (statistical assessment of risk in insurance) to look at the sector of trade, the credit history of the companies involved, previous bad debt experience and a number of other factors.
Based on this analysis, the underwriter will establish a credit limit for each company to which the credit insurance will apply. That means that they cannot owe you any more than this specified maximum amount and the cover still remain valid. In some instances this may not cover the total amount of the trade but a percentage only.
In addition to its basic protection, credit insurance has the added value of offering insight into the credit-worthiness of your customers. This is one advantage by offering trade credit which will allow you to make smarter strategic decisions as you grow the business. Most insurers also offer legal assistance via their own teams to help recover debts, which can be very useful.
Types of Policy
Credit insurance is now a popular field with different solutions tailored to different segments of the market.
It is possible to choose:
- Whole turnover cover
- Specific cover for a single customer or group of customers
- Risk management for multi national / export business
What is Export Credit Insurance?
Dealing with customers in other countries obviously brings with it its own specific risks. The flow of money may be slowed by customs or supply chain delays, and there are sometimes specific political situations which place extra risk upon commercial situations.
Depending on the country it may also be more difficult to assess the foreign clients financial status, or indeed the instances which could delay payment.
For this reason export finance credit insurance is a popular segment of the credit insurance industry.
Political Risk Cover
This is offered by some trade finance specialists covering the potential delays to payment which might come from money transfer restrictions, or the insolvency of a government buyer.
Our political risk insurance helps businesses to protect their overseas investments in situations such as political violence or confiscation of assets, or other risks pertaining to the actions of a foreign government.
Top 10 Reasons to Buy Trade Credit Insurance
Ultimately, trade credit insurance is there to quickly replace money lost through bad debt
It helps you make the right decisions more quickly, improving efficiency and ultimately profitability
3. Peace of Mind
Feel safe in the knowledge that your outstanding invoices are protected
It helps in securing trade finance which improves banking relationships and access to finance
Improve profitability by safely increasing your exposure to more customers
It helps you remain competitive by enabling you to offer open credit when your competitors can’t
It facilities expansion with security and allows you to deal confidently with new clients and increase credit lines to existing ones
You gain access to greater customer intelligence that leads to balanced risk decisions
9. Cash Flow
It complements and enhances existing credit control procedures to improve Days Sales Outstanding’s
It provides you with confidence to enter new markets, including overseas
How much does Credit Insurance Cost?
The price will depend on the nature of the cover you need, how much you’re insuring and the potential risk for the insurance company.
The premium is calculated as a percentage of the total amount of revenue being insured, starting from around 0.15% of insurable turnover. In some cases it does work out much higher than this if there is imperfect credit history or other red flags.
Is Credit Insurance Worth it?
As with any type of insurance, there is a calculation to be done around risk. You’ll need to assess:
- What are the financial implications of a client become insolvent or failing to pay you.
- How solvent or financially stable are your clients
- How volatile is the industry in which you’re working
- Are their factors beyond your control such as market forces, or a changing culture which could impact your clients ability to pay?
If you conclude that non-payment from a major client could seriously jeopardise the stability of your own business then bad debt protection is likely to be a wise choice.
You could frame it using sales and profit margin figures. For example, if your company has a 10% profit margin and a buyer fails to pay a £10,000 bill you would have to make an extra £100,000 to make up the shortfall. Think about how easily you could do that and whether it would create a drain on resources.
Trade Credit Insurance For Small Businesses
Trade credit insurance can be essential to ensuring a small businesses’ continued success. It can provide powerful information and support that your business might not have otherwise. While there are policies available for SME’s, it tends to be medium or larger businesses who opt for credit insurance.
Companies like Towergate led the way in making trade credit insurance more accessible to SMEs and now a number of insurers are open to creating policies for smaller organisations. It may not be suitable for every small businesses but brokers should be able to offer advice on whether the cover will work and where to get it. The average payout for trade credit insurance in the first quarter of 2018 was over £13,000, which may give some indication of the size of deals that tend to be covered.
It is particularly popular in industries with historical volatility. The Association of British Insurers (ABI) reports that just under 75% of credit insurance is taken by businesses operating solely in Britain, while the the remaining 25% use it for international trade protection.
Who Can Use Trade Credit Insurance?
A number of specialist providers are now offering specialist credit insurance for smaller turnover companies which is great as this was only offered to larger businesses.
We are a leading Invoice Factoring Brokers so we work with a number of insurance companies to get you the best rate for trade credit insurance.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.