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Protecting Your Business With Trade Credit Insurance

Posted 1 years ago

Protecting Your Business With Trade Credit Insurance
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Late payments are something that befall most businesses, but what happens if you’re due payment from a company who has already received your goods and does not pay? This is where trade credit insurance could help. In this guide we explore the importance of trade credit insurance and how it could protect your business against unforeseen events. 

What is trade credit insurance?

In essence, trade credit insurance offers cover for those businesses whose customers owe them money for services and products and do not pay. This protection gives businesses who have just started out greater conference to extend credit to new customers. 

Trade credit insurance is designed for a range of businesses, whether it be SMEs or multinational corporations, who sell goods or services on credit terms to other businesses, and is particularly important in industries such as retailing, where payment can take up to six months. 

When providing credit insurance, insurers may cover two types of risk that a business can include in their cover: commercial risk and political risk. The former may refer to a situation where a business’ customers are no longer able to pay outstanding invoices as a result of financial reasons, while the latter focuses on non-payment as a consequence of extenuating circumstances due to political events, such as natural disasters. 

How does trade credit insurance work?

An insurance policy will be very much dependent on the type of business, and is arranged to meet the needs of a policyholder’s business. An insurer will often assess the creditworthiness of and monitor a policyholder’s customers, assigning them each a credit limit. This is the amount an insurer will protect the business, if the customer fails to pay. 

An insurer may keep track of a business’ customers in a variety of ways, such as: analysing financial statements, public records and visiting the customer. The purchasing of a credit insurance policy will give the policyholder access to information which will enable them to preempt adverse customer trends. 

What are the different types of credit insurance?

There are different types of credit insurance policies to suit the needs of all businesses:

  • Single Risk/Buyer – A policy that covers an isolated single risk. This policy is relevant if the policyholder is exposed to a particular market risk, such as an exceptional transaction in relation to the value of the customer’s overall book of business.
  • Export – A policy that is specifically designed for exporting companies, and provides additional cover for a range of risks such as new import restrictions or war.
  • Multinational – A policy that provides 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.
  • Excess of Loss − A policy that covers for exceptional losses over and above the normal level of bad debt by setting an aggregate first loss for the whole policy period. 

Authors: Oliver Murphy & Sacha Bright


WNextFin is not regulated to sell insurance products. This article is intended only for information purposes only and you should conduct your own research before considering purchasing any insurance products. NextFin takes no responsibility for the accuracy of the information in this article. 

Tagged: entrepreneur sme alternative finance

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