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Why Trade Credit Insurance?
A look at many businesses today would reveal that a significant portion of their current assets on their balance sheets are in the form of receivables. That is, money owed for goods supplied on credit terms. Though Accounts Receivables represent the single biggest asset of many companies, it’s mostly at risk since they are commonly uninsured.
Every creditor faces the risk of non-payment or delayed payment due to customer insolvency, protracted default and political risks that prevent the buyer from fulfilling its payment obligations. You therefore need Trade Credit Insurance
In simplest terms, Trade Credit Insurance is Business Credit Insurance, Export Credit Insurance, Credit Insurance, or Bad Debt Insurance. It is a risk mitigation tool that protects against payment default risks and protects businesses from non-payment of commercial debt.
Trade Credit Insurance (TCI) provides businesses protection against its commercial customers' inability to pay for products or services, whether because of bankruptcy, insolvency, or political upheaval in countries where the trade partner operates.
It helps ensure that invoices will be paid and allows companies to reliably manage the commercial and political risks of trade that are beyond their control by ensuring capital is protected, cash flows maintained, loan servicing enhanced, and earnings secured.
WHAT YOU NEED TO KNOW
What Risk Do Sellers Face When Offering Trade Credit?
One of the most significant risks of offering trade credit is the potential for bad debt, where customers fail to fulfill their payment obligations. This scenario can lead to financial losses and may require a business to write off the debt as uncollectible, impacting profitability
Why Do Businesses Need Trade Credit Insurance (TCI)?
Businesses invest in TCI for a variety of reasons, including: 1. Sales expansion and profitability – a company can safely sell more to existing customers or go after new customers that may have been perceived as too risky and hence improve profitability. 2. Expansion into new markets – protection against unique export risks and market knowledge to make accurate growth decisions. 3. Better financing terms – your financial partners will typically lend more capital against insured receivables and may also reduce the cost of funds. 4. Reduction in bad-debt reserves – insuring receivables frees up capital for the company and Credit control procedures – enhances existing credit control procedures and helps the business manage customer payments more confidently. 5. Credit control procedures – Enhances existing credit control procedures and helps the business manage customer payments more confidently.
Who Buys Trade Credit Insurance?
Trade Credit Insurance is available to businesses of all sizes to protect both international and domestic trade, from SMEs to large corporates and international businesses across any sector that supplies goods or services on credit terms. Businesses also use TCI to help them secure finance and working capital with banks, explore new markets with confidence and attract new customers with favorable credit terms.
How is Trade Credit Insurance Underwritten?
Once you’ve signed for TCI, you’ll be required to provide the insurer with a complete list of buyers to whom you sell goods on credit. The insurer will then follow the following procedure: - 1. Collect information about each buyer, 2. Determine the credit limits for each client, 3. State the steps to be followed if a buyer fails to pay and 4. Accept your Trade Credit Insurance policy by providing coverage. The insurer starts by assessing the creditworthiness and financial stability of your customers, in order for them to underwrite safe credit limits on them, with risk coverage up to the agreed limit. They then provide regular updates on those trading limits, adjusting them based on changing conditions and support your business growth by repeating this process for every new customer. In the event you notify the insurer about a non-payment for an insured customer, the insurer will investigate, and if policy terms are met, indemnify you for the insured amount.
Is Trade Credit Insurance Necessary For Long Term Customers?
Experience tells us that economic and commercial pressures can affect the financial health of all companies, including long-standing customers and previously reliable payers. Evaluating the on- going risk of non-payment requires a significant amount of effort and expertise in obtaining and evaluating the latest financial information, that’s not always publicly available. Which is where Trade Credit Insurance comes in.
Would The Cover Apply On Trade Receivables From Government Agencies?
Government-related buyer involvement in trade transactions introduces a much complex political risk aspect which unfortunately forms an exclusion to most insurance policies and Trade Credit Insurance is not an exception. The political risk may arise as a result of confiscation, nationalization, expropriation, or due to the order of any government, public or local authority or by any restrictions on trading or the transfer of funds, or contract frustration due to political events or by sovereign payment default.