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Trade Credit Insurance: What It Is and Why You Need It

By 18 February 2022No Comments
Trade Credit Insurance: What It Is and Why You Need It
Trade Credit Insurance: What It Is and Why You Need It

What Is Trade Credit Insurance? 

Suppliers of goods or services often need to offer credit terms to their customers. This puts a supplier at risk of not being paid. Trade credit insurance reduces this risk of non-payment by paying claims up to 85% of the outstanding debts to the value of the policy’s specific coverage limit. Trade credit policies enable companies to expand without taking on unnecessary risk. Companies can provide new or current clients with credit, irrespective of their finances, without worrying too much about whether or not they will be paid back. 

Credit insurance policies are priced based on the estimated turnover of a business, the debtors age analysis indicating the size and number of clients to be insured, overall creditworthiness, and the associated risk of the particular sector that the entity trades in.

Companies of all sizes can take out trade credit policies. Although this type of insurance is particularly suitable for small and medium sized enterprises (SME’s) with limited buyers, offering a more affordable alternative to self-insurance. The larger corporations would consider catastrophe cover for the risk against business rescue and liquidation only.

How Does It Work? 

The cost of trade credit insurance policies is determined in relation to the perceived risk posed by the insured. Insurance providers consider a range of factors when assessing a company’s risk. These often include the creditworthiness of buyers, the amount of transactions per client, the repayment period, and the client’s industry. 

Policies may be customised to meet a company’s risk profile and budget. Cover may include only a single trade partner, a group of trading partners, or all of their buyers. Each client will receive a specified credit limit based on their credit record, annual financial statements and management accounts to date. Top up credit insurance, to cover outstanding debt not covered by the primary insurance policy, may be provided by some insurers. 

What Are the Benefits of Credit Insurance? 

Non-payment of credit can negatively affect a company’s finances. Credit insurance assists companies in mitigating this risk. However, there are several other benefits associated with this type of insurance, including: 

  • Competitive advantage: By providing credit when many competitors are unable to do so, companies can stay competitive. 
  • Security: Cash lost due to bad debt will be replaced to a large extent. 
  • Expansion: Because unpaid debt is up to 85% covered, companies can securely and confidently offer credit to new clients, which allows them to grow their business. 
  • Funding: Assists with the acquisition of trade finance, improving relationships with banks and access to capital as well as assisting in obtaining debtor discounting facilities. 
  • Profitability: Offering credit to new clients may attract more clients, ultimately contributing to a growth in turnover & profits.

What Is Not Covered by Credit Insurance? 

As with any insurance policy, certain exclusions apply. It is critical to be aware of what is included in a policy, and what will not be covered, before settling on a specific insurance policy. 

Trade credit policies do not cover: 

  • Fraud. Any fraud related occurrence, if the credit application from the buyer was fraudulent, the claim will be repudiated as the onus is on the policyholder to ensure the credit application is from the actual debtor.
  • Dispute between the debtor and the policyholder. 
  • Any interest accrued following missed payments. 
  • Queries from buyers on invoices.
  • Non-payments as a result of civil war, invasion, act of foreign enemy, hostilities or warlike occurrences.
  • Penalties or damages for which the client is responsible. 
  • Breach of contract by the debtor or an agent of the debtor.

DG Capital: Credit Insurance and Insurance Broking Services 

DG Capital can assist your company in securing affordable credit insurance tailored to your needs. You can find more information on our trade credit insurance broking services as well as other insurance broking services here, or reach out to us here, and let us know how we can help support your business.

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