Trade credit insurance

Trade credit insurance is a risk management tool that protects against the losses that might occur after the delivery of goods has been done. It is an insurance policy that provides coverage to manufacturers, traders, and other such service providers.

It covers them against the losses that they might have to incur because of the non-payment or delayed payment of any commercial debt. Trade credit insurance pays out for a percentage of the outstanding debt when the buyer due to reasons like bankruptcy or insolvency is not able to make the payments.

Trade credit insurance plays an important role in maintaining the national and international trade market. It prevents the trader’s from becoming bankrupt. It helps companies to manage their credits and also provides the trade companies opportunities to expand in the global marketplace.

Let’s understand trade credit insurance in depth.

What are the risks that trade credit insurance provides coverage for?

The primary function that trade credit insurance serves is to protect the sellers against the buyers that cannot pay due to some circumstances or are not willing to pay deliberately. It provides protection against the buyers that have declared a legal status of insolvency, bankruptcy, or any other such situations that is acceptable under the law.

As explained by the International Credit Insurance and Surety Association, trade credit insurance pays out for a specific percentage of the outstanding debt. The percentage covered and compensated for under the policy usually ranges from 75 to 95 percentage of the invoice amount. It might also be higher or lesser depending upon the type of coverage purchased by the seller or the insured.

Here are a few other things against which the policy provides protection:

Protracted default

This is a case wherein the buyer fails to make the payment within the pre-decided time period. The tenure is calculated from the due date of the payment of the receivable or delivery of goods.

Political risks

Under a few policies, the insured also has an option to receive coverage arising due to political risks that include non-payment due to:

• Restrictions on transfer or inconvertibility.
• Restrictions on import and export.
• Wars.
• Natural Disasters.
• Cancellation of trade license, etc.

Trade credit insurance policies are flexible enough and allow the policyholders to choose their coverage. Policyholders can choose to cover their entire portfolio or just the key accounts.

Things that are not covered under this insurance policy?

There are various things that are excluded under the policy:

• Radioactive contamination.
• Problems in payment due to personal disputes between the buyer and seller, the costs incurred in resolving them.
• Penalties the buyer is entitled to pay.
• Contract of sale made with private individuals.
• The amount owed by the state or central government and the institutions or departments controlled by them that cannot be declared as insolvent under any circumstance.

Benefits of trade credit insurance

There are numerous benefits offered by this insurance policy that prove to be extremely beneficial for businesses even in the long run. Listed below are a few of them:

1. Protects the company’s Balance sheets and P&L against bad debts.
2. It potentially reduces and quantifies the provisions for bad debts.
3. Offers better borrowing and financing options.
4. It increases profitability.
5. Enhances the confidence of the seller and motivates him to expand his business.
6. Helps in maintaining the cash flow, budgets and business plans of the traders.
7. The insurers undertake thorough screening of the buyers, the information they collect might also help the seller to protect himself from frauds and losses.
8. Helps in improving credit decisions.
9. Trade credit insurance also helps in protecting the interests of the investors and stakeholders.

When should the traders or companies purchase trade credit insurance?

It is advisable that the trading companies take up trade credit insurance when their business is good and their financial status is stable. So that when problems strike them they don’t end up with heavy losses and debts.

Companies often make the mistake to buy trade credit insurance when they have a credit problem or there is a forecast of any such problems in the near future. This might be too late to get insured and eventually they might suffer losses.

In today’s world, taking up insurance has become very easy due to the digitization and revolution of the online world. Businesses can easily surf through the internet, study the various plans offered by different insurers, compare them and take up the trade credit insurance that suits their business and its dealings the best.