Financial Planning and Analysis

Is Trade Credit Insurance Necessary For Your Business? 

8 days ago


Bad debt risks are associated with businesses that sell products and services on credit. Customers can possibly fail to pay their dues because of insufficient funds or insolvency or bankruptcy. It is necessary to avoid getting victimized by bad debts. Fortunately, an effective risk management strategy associated with uncollectible debts is to invest in credit insurance. 

Even big organizations need to consider trade credit insurance. Companies that sell products nationally and internationally can lose funds if customers are unable or don’t pay the owed amount. Exporters experience the extra danger of unpaid debts due to political jeopardies like expropriation and war. 

Good reasons to invest in business credit insurance

Some valuable reasons businesses invest in trade credit insurance are given below. 

Control financial risks

Before extending credit, the majority of businesses evaluate the potential customers' financial status but these are not fool-proof measures. There are chances that customers can experience financial issues all of a sudden. Credit insurance coverage allows you to efficiently control these risks.

Smooth cashflow

Sufficient cash flow is crucial for the smooth operation of any kind of business. Investing in credit insurance ensures that the necessary cash is available even if the customers fail or delay in paying their bills.

Monitor customer’s creditworthiness

Credit insurance provider keeps track of the policy-holders customer’s creditworthiness all across the policy term. Insurance provider’s analysts are capable to access extensive data and evaluate the financial status of existing and prospective customers quickly. 

Competitive edge 

Investing in credit insurance allows your business to develop because they offer customers competitive financing options including better payment terms or high credit limits.

Better loan terms 

With credit insurance, your business can get appealing financing terms from lenders.

What are the risks covered with credit insurance?

Trade credit policy covers losses due to a variety of risks associated with buyers including -

  • Insolvency - The policy will define the kind of event, which is qualified as insolvencies like compulsory liquidation or bankruptcy.
  • Protracted default - Buyer is unable to pay the insured debt on time even after the seller has offered an affordable extension. 
  • Political risk - Exporters cannot pay by the due date because of political risks like piracy, confiscation, expropriation, embargo, currency incontrovertibility, and other public or government authority acts.

What are the limitations of credit insurance?

Credit insurance providers establish payment terms and credit limits for your customers. You can extend credit to a specified limit. If your customer cannot pay for goods purchased then you will pay more than the insured percentage of your customer's credit limit.

The liability of the insurance provider is to pay all the losses incurred during the policy period. 

What is excluded from the credit insurance policy?

The common credit insurance policy exclusions involve -

  • Conflicts between you and your customer, if any needs to be totally resolved.
  • If you deliver good to a customer having an insolvent condition or is negligent on bill payments.
  • Nuclear radiation.
  • Sales contract breach.
  • Dishonest acts. 

A credit insurance policy differs. It can cover a single or all your debtors. A trade credit insurance policy empowers the insurance provider to seek recovery from your at-fault customer once you get compensated for your loss. 

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