Often when a customer order goods or services from a supplier, the supplier offers payment terms whereby the invoice will be paid by the client a certain number of days after the goods or services have been delivered. These payment terms often call trade credit allow a supplier to grow its business and to close more deals. However, if giving flexible trade credit terms to your client is an important key to grow your sales revenues, it could put your business at risk.
Trade credit insurance is one of the tools that will help you mitigating your risks of non-payment. In the article below, we will explain what trade credit insurance is and how it works.
1 – What does trade credit insurance cover?
Trade credit insurance is not just an insurance. It is a comprehensive solution to manage your account receivables which lays on 3 pillars:
- Prevention and information on your clients: thanks to their credit expertise and market knowledge, trade credit insurers give you access to up-to-date commercial information about your clients. It will allow you to get a professional assessment of their financial situation and adapt your credit terms accordingly.
- Protection: it provides protection in respect of certain events which affect the ability of customers to pay invoices.
- Debt Collection: trade credit insurer will provide their market knowledge and capabilities to collect the unpaid invoices.
Thanks to these 3 pillars, trade credit insurance is a viable risk management tool to improve the protection of your account receivables.
2 – What are the events insured by the trade credit insurance?
Commonly trade credit policies provide cover for:
- The protracted default of a customer: this occurs on the non-payment of all or part of an undisputed invoice. The trigger for payment will usually occur on the expiry of what is called “the waiting period”. The waiting period is often around 90 days and could be up to 120 days.
- The insolvency/bankruptcy of a customer defines by the terms and conditions of the insurance policy.
- A political risk event: due to a political event in its home country, the customer could not meet its financial commitment.
The scope of cover could vary. In general, the first 2 events are included in the trade credit insurance. The political risks will be included on case by case basis or via a stand alone insurance policy.
3 – How does trade credit insurance work?
Trade credit insurance could cover a single debtor for a single transaction or the yearly turnover of the company. We will explain here how the trade credit insurance for the yearly turnover work.
In a first stage, the insurance company will ask you to provide information about your client portfolio, the credit limit per each client, the amount of account receivables and any previous incidents. The insurer will then analyse your client portfolio risk profile to decide about the terms and conditions of the cover.
The insurer will set up 2 type of insured limits:
- A discretionary insured limit: low limit of few thousand USD (USD 5,000 to USD 10,000) to protect your whole portfolio of clients.
- Some individual insured limits for each of your clients. Policyholders need to be aware that insurers can often withdraw or vary credit limits during the policy period which could sometimes make the relation with the insurer challenging.
The insured credit period could vary. It could go up to 120 days starting from the date of the invoice.
In case of unpaid invoice, the insurer pays in general up to 90% of the insured limit.
4 – How much does it cost?
The rate of premium of the trade credit insurance will depend on several factors. The insurance company will calculate the rating take into consideration the domain of activity, the turnover, the maximum payment terms, the loss history.
This is difficult to give an idea of the rates, especially in this challenging period. What we could say however is that rates usually go from 0,1% to 0,5%.
5 – Who are the main players?
The 3 leaders in trade credit insurance are Euler Hermes, Atradius and COFACE. They are all present in Asia. They are more selective in this period of uncertainty but they are still underwriting new business.
6 – What are the main advantages of a trade credit insurance?
There are many advantages to contract a trade credit insurance:
- Protection of your account receivables
- Increase of your revenues by giving more flexible trade credit to your clients
- Access to commercial information and market knowledge
- Debts collection recovery
The right trade credit insurance policy has the ability of reducing a company’s global trading risk and exposures.
Looking for a trade credit insurance
We hope you have enjoyed reading this article.
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