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Trade credit insurance and bank guarantees are both instruments that are used in business. The scope of both these instruments is similar, although they do have their differences. In the span of this article, you will learn about what both of these instruments mean, as well as the features, benefits, and importance of each of the instruments.
Lastly, we will cement both concepts in your mind by giving you simple and easy to understand real world examples of the workings of both these instruments. Let’s initiate the topic!
A Trade credit insurance is a contract between the insured (generally a business) and the insurance company. The role of a trade credit insurance (TCI) policy is that it provides coverage to the policyholder in the event that the client of the policyholder (a business) does not fulfill its payment obligations. Any losses originating from this are covered by the insurance company. We will explain this concept further with an example.
A bank guarantee is a written promise made by a bank that, in the event that a client defaults on his payment, the bank will step in and make the payment on behalf of the client. This instrument is important where there is a trust deficit. It increases business transactions because businesses are much more likely to conduct business freely by leveraging bank guarantees.
Trade Credit Insurance
Who are the parties?
Generally, a TCI will be between the insurance company and a business.
Generally, a Bank Guarantee will be between a client and a bank. An insurance company is not part of the equation.
Who bears the risk?
The risk is borne by the insurance company.
The risk is borne by the bank.
Where are they used?
It has wide applications, and is used across a variety of industries.
It is also used across a variety of industries.
Which companies / banks provide this?
1. HDFC Ergo
2. Tata AIA
3. ICICI Lombard
Just to name a few.
All major banks provide this facility.