Understanding The Difference (And What’s Right For You)
If you’re working in the world of international trade, selling goods in unstable countries, or otherwise working in the import/export trade, and you’d like to insure your accounts receivable against the risk of non payment and bad debt, you may be wondering what a better choice is for you – surety bonds, or trade credit insurance.
Depending on your own situation, either option may be a good choice for risk management. So, in this article, we’ll break down the difference between surety and trade credit insurance, to help you choose the right product for your needs.
Understanding Surety And How It Works
Surety, which is also often called “surety bonds,” is a contract which involves three parties.
- The obligee – This is the party in the surety who is the recipient of some kind of obligation, such as a contract.
- The principal – This is the party in the surety who is responsible for carrying out some kind of obligation. Again, this usually takes the form of a contract.
- The surety – The surety is the person who assures the obligee that the principal can perform the task to which they are contractually obligated.
Essentially, the surety is a type of guarantor for the bond. They guarantee that the principal will carry out the task to which they have agreed. If this is not possible, the surety is responsible for compensating the obligee – according to the terms agreed upon by the contract. The principal is responsible for paying penalties to the surety, according to the contract terms.
In most cases, the principal pays a premium to the bonding company in exchange for surety credit. This is used as a way to assure clients that their contracts are guaranteed and that they will be able to live up to their obligations.
Trade Credit Insurance
Trade credit insurance protects your company from the risk of another company failing to pay you on your agreed-upon credit terms – such as Net 60 – due to bankruptcy, a failure to respond to any kind of communication, and other such covered events.
If one of these events occurs, you will be compensated for a set amount of the value of your invoice. Usually, this ranges from 75-100% of the value of the invoice, depending on your policy.
In addition, this type of insurance can also often be purchased with political risk insurance. This insures you from political risks such as war, civil violence, currency exchange and repatriation issues, and other risks that can occur in developing countries.
Typically, when you take out a trade insurance policy, you’ll pay a certain percentage of your overall revenue to an insurance company. Then, your insurer will cover all of your invoices, up to a certain limit.
So, What’s Right For Me?
Both trade credit insurance and a surety bond can be right for you, depending on the industry in which you work.
If you’re an importer/exporter, for example, and are worried that political instability in a country where you work could prevent clients from paying you, trade insurance with political risk insurance is a valuable way to protect your business. You don’t need a surety bond – because you, not your client, are the party at risk of not being paid.
In contrast, surety bonds are a guarantee that you will follow through on your end of a contract. If you work as an infrastructure developer and are building roads in another country, for example, a surety bond may be required to ensure that your work is carried out properly – and your client can be compensated if you don’t.
Learn More From Niche TC!
If you’re still confused about whether or not you need trade credit insurance services, or you’d like more information, contact Niche TC right away. We can help you understand the difference between these products in more detail, and choose the right policy for your business.
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