Are you able to sell products to customers using credit? Are your customers unable to pay the balance due at the end? What can you do to protect your company against bad debts? Trade credit insurance is something you might not be aware of. Continue reading to learn how trade credit insurance protects your business from the risk of customer default on sales made under credit terms.
Trade credit insurance (also known as accounts receivable) insures your company against the default of your customer to repay its trade debts. This insurance is available to any business that operates on credit terms.
What Are The Features Of Trade Credit Insurance?
The policyholder receives trade credit insurance to cover the invoice amount of goods/services that were delivered to customers but not paid due to insolvency or default of the customer and political risk (in the case of export transactions).
Most policies are written for 12 months and cover goods/services that were delivered to customers during that period.
As a percentage of sales, the premium is charged. The policy includes risk-sharing in the form of self-insured retention.
Trade credit insurance is important for your business.
This protects against customer default on sales that were made under credit terms.
Increase sales for existing and new customers.
This program supports a company’s accounting receivable management and validates credit protocol.
Concentration risk is reduced when large portions of a company’s sales are concentrated with a small number of customers.
- Reduces your company’s bad debt reserve.
- Offers attractive bank funding.
- Establishes new markets for export sales.
Trade Credit Insurance Benefits Safer Business Growth
Trade credit insurance provides its insured with the confidence to expand their business and explore new markets. Trade receivable protection is a quick and easy way to increase credit lines with existing customers or extend credit terms to new customers. It also provides security and peace of mind. Trade credit insurance could allow a company to ease existing credit conditions, thereby increasing its competitiveness and ultimately allowing for more trade.
Businesses can borrow more with Trade credit insurance. Lenders are usually sensitive to the extra security it offers. Lenders may require that trade credit insurance be in place before they will approve a loan. To obtain better borrowing terms, trade receivables that are insured can be used as collateral or assigned to the bank. The key function of Trade Credit Insurance is to protect the company from bad debts. Bad debt insurance can have a positive effect on the company’s bottom line. A non-specialized company carries a significant credit risk.
Trade receivables can often make up 30% of total assets. Non-payment can have severe consequences. Trade Credit Insurance protects against bad debt losses that could affect the financial strength and profit of the seller/insured. By reducing bad debt reserves, the policyholder can improve earnings, shareholder equity, and financial ratios.
A trade credit program with a credit insurance company is more than just protecting trade receivables. Partnering with a credit risk management specialist who can help you recover from credit losses, and avoid them altogether, is essential. Trade credit insurance provides valuable market intelligence about the financial viability and trading risks of customers.