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What is trade credit insurance and how does it work, see below?


With trading clients having the potential to build and destroy a business, financial protection is high on the agenda for most business owners and this is precisely the role credit insurance plays in it.

By transferring risk from the business and to the insurance company, credit insurance protects the policyholder if a customer becomes insolvent or fails to pay his trade credit debt. Not only that, insurance companies can actually help reduce the risk of financial loss through credit management support.

What types of coverage are covered in a credit insurance policy? And under what circumstances might you need it most?

Types of credit insurance are

First, let's take a look at the types of credit insurance available. There are several main options to choose from depending on the risks you may face, which are detailed here:

1.Full round credit insurance

It is the most commonly held type of credit insurance policy and covers all-or most-businesses through a comprehensive policy based on their turnover, protecting the business against default of all current and future customers over a typical 12-month period. This allows the company to offer credit to its customers up to a fixed limit, at an overall premium price on its annual turnover. Businesses can choose a fixed policy with a set premium price, or they can declare their turnover both at the beginning of the policy and at the end to receive a rebate, if their turnover is less than the initial estimate.

2.Key purchasing policies (critical customer coverage)

Unlike an overall turnover policy, ultimate buyer protection allows you to insure your business against named customers who fail to pay. As a rule that is, this type of coverage allows you to name up to 10 key customers, most likely the customers who will have the most impact through non-payments. Also known as a master account or named buyer policy, this type of credit insurance is also useful for protecting customers with poor credit ratings or who are likely to go bankrupt, which could leave your business vulnerable. You can choose a limit level, but you are still fully responsible for all customers not mentioned in the policy.

3.Single risk protection

Also known as special risk insurance or single purchase policy, this type of coverage protects the business against non-payment from a single customer or contract. The premium price is based on the size of the customer's turnover or the value of the contract, and is often taken by companies that rely on the main byer for most of their sales. This type of credit insurance can be requested by financiers or investors who want the business to purchase protection against key customers. Often this is seen in public companies but can include any company with good credit quality.

Export trade credit insurance

4.Export trade credit insurance

This type of trade credit protection protects businesses from their overseas customers who fail to pay them. Businesses can adopt policies that cover only their exports or domestic trade, but most policies will accommodate both. As such, export trade credit insurance is often integrated into standard policies for businesses that trade internationally, and can offer broad coverage as well as standard coverage for insolvent and defaulting customers. For example, businesses can cover anything from political risk to currency shortages to social and economic instability to government intervention.

When did trade credit insurance start running?

Credit insurance policies also cover defaults," he continued. Any business owner will know that it is quite common for customers to pay after the invoice due date. However, there are times when payments are so late – perhaps 60 or 90 days past the due date, depending on the policy – that the insurer should be notified. A few days after notification, they will consider the claim.

At that point you can also take some kind of legal action against the customer to recover your money. However, the insurance company may still consider and pay the claim while your litigation continues. This is usually only if the debt is not in dispute, unless you have dispute protection. In this case, the insurance company will pay regardless and recover the funds once the dispute is resolved.

Protection against international risks

Another important situation in which credit insurance companies will step in is a political event,” explains Laurence. “For example, a company may have exported goods to another country. The country's government then imposed sanctions on Britain, preventing customers from paying for the goods. If a company has political risk coverage added to their credit insurance policy, a claim will be triggered by this event.

Political intervention is not the only potential problem facing exporters. They are also very vulnerable to loss due to the lack of available information about overseas customers. This can be compounded by the language barrier, which can become more apparent when discussing overdue debts.

Credit insurance: plus

Credit insurance providers can offer expert assistance as well as cash flow protection – especially when setting a credit limit. Relying on credit reports and trading history as a form of risk assessment often proves inadequate and time consuming for businesses. However, credit insurance companies can manage trade credit risk effectively and efficiently on behalf of the policyholder.

Credit insurers who have a very large database of information, which they can use to quickly set a credit limit (i.e. the maximum amount that can be owed to the policyholder). The insurance company can then monitor the situation if there are positive or negative changes in the customer's risk profile, and notify the policyholder accordingly,” explains Laurence.

As a policyholder, you can request a credit check (aka limit application) on the customer. Your insurance company will assess the risk and send you back a decision on the level of credit you should extend. It may or may not be what you expected, but at least you know it's been risk-assessed properly and you're insured.

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