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Trade Credit Insurance Vs. Surety

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.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Constitutes A Breach Of Contract For Political Risk Insurance Coverage?

Political risk insurance is key if you’re working in a country where there may be a civil disturbance, political violence, a financial crisis, currency inconvertibility, or any other condition which could result in the loss of foreign direct investment.

This type of investment insurance is designed specifically to protect your company from political risks of doing business in the host government or host country. It may be issued by private insurers and export credit agencies like Niche Trade Credit, a state owned enterprise, or an investment guarantee agency, MIGA (Multilateral Investment Guarantee Agency, for example, or World Bank Group.

But when you’re working in emerging markets and developing countries, with a state owned enterprise or private company, when does political risk insurance cover a breach of contract?

What Is A Breach Of Contract?

There can be many different types of contractual breaches that result in political risk insurance coverage compensating your company for the costs you’ve incurred as a result of the breach.

The most common is the failure to honor sovereign financial obligations. If a financial obligation is not honored by a sovereign nation which has promised to do so unconditionally, this is typically a breach of contract, resulting in your insurance agency compensating your for your loss.

For example, perhaps a government in a developing country promised to compensate you with a $10 million contract for opening a facility in their country. Then, they failed to meet this unconditional guarantee, once you lived up to your end of the deal. This would represent a failure to honor sovereign financial obligations.

However, if a contract is breached in any other way – for example, if the host country expropriates your property, declares your company to be working illegally, or takes another action that violates the terms and conditions of your initial contract, this will likely also be covered by your political risk insurance coverage.

You Need The Right Political Risk Insurance Coverage To Protect Against Breach Of Contract

When you choose a political risk coverage insurer, it’s important to make sure that you choose a policy that protects against all of the major risks that could face your company when working in the developing world, such as:

  • Civil war, insurrection, revolution and political violence
  • Breach of contract
  • Monetary/currency conversion issues or inability to get funds from the state
  • Expropriation of private property

These are just a few of the coverage options that your company has. To protect your business and your profits, it’s important to get coverage for all of the risks that could face your company. We recommend consulting with a political risk insurance professional for more details.

Interested In Political Risk Insurance? Contact Niche Trade Credit Now!

At Niche Trade Credit, we specialise in export insurance and political risk insurance. If you’d like more information, please contact us right away. We’re always happy to hear from new customers.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Is Whole Turnover Trade Credit Insurance? Do I Need It?

If you’ve been looking into protecting your balance sheet with trade credit insurance, you may be wondering what it means to purchase a “whole turnover” policy. What does whole turnover cover? What does it mean? Can it protect my cash flow? In this brief blog, we’ll answer all of those questions, and more! Let’s get started.

Whole Turnover Trade Credit Insurance Covers All Of Your Accounts Receivables

Up to a certain credit limit, whole turnover credit insurance will provide a percentage of coverage for your entire balance sheet.

These discretionary limits and the percent of cover that a trade credit insurance coverage policy offers are set when you purchase your policy.

As a rule, the higher the percentage of accounts receivables, the higher your premium will be. The same is true of each buyer covered – higher credit lines and higher invoices will mean a higher premium.

What this does is protect you from bad debts. Insured turnover means that, if your export trade company is not paid by a particular company, you can still recover funds, up to the limit set by your policy. This preserves your cash flow, and allows you to continue operating, even if a customer defaults.

Do I Need Whole Turnover Trade Credit Insurance?

This really depends on how many clients you have, how reliable they are, and their payment history.

In many cases, it may make more sense to simply cover individual clients or transactions with their own trade credit insurance policy. This is very common, and often done for particularly large sales, or when selling to companies that are new to the industry, or located in unstable nations.

Most often, whole turnover trade credit insurance policies are used for those who engage in wholesale trade or international trade with just a handful of large clients. These policies are the most valuable for companies who would face serious financial difficulties if any of their large clients fail to pay, or fail to pay in a timely manner.

So, if you tend to work with a large volume of companies and have smaller transaction amounts, you may not need whole turnover trade credit insurance. But if you work with just a few large companies, and you would have cash flow difficulties if any of these companies defaulted, you may want to consider whole turnover trade credit insurance.

Learn More From Niche Trade Credit Now!

At Niche Trade Credit, we specialise in trade credit insurance services and whole turnover insurance. We can provide you with a reasonably-priced policy that will protect your company, and give you peace of mind. Contact us now to learn more.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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Understanding Export Insurance Coverage

Purchasing an export insurance coverage policy, also sometimes called a trade credit insurance policy, is a great way to protect your accounts receivable from payment risks, and short-term losses from companies who fail to pay their invoices on time.

But there is often some confusion about what, exactly, export credit insurance will cover. Is it import/export insurance? Can you use it domestically, or does trade credit insurance only cover a transaction with a foreign buyer in international trade?

So, in this article, we’ll help you understand this type of insurance. Exports, importers, and even domestic companies can benefit from it, so let’s get started now.

What Does Export Insurance Cover?

Trade credit insurance is designed to do only one thing – to protect your business and your cash flow from bad debt, caused by trade partners failing to pay your invoices on time. When a customer fails to pay for your products on time, faces protracted default or insolvency, or otherwise does not pay, your policy will compensate you, based on the value of the invoice.

And, despite the fact that it’s usually called “export insurance,” these types of policies can be used to protect invoices sent abroad and domestically. This is especially important if you work with just a few major customers – and the failure by any customer to pay their invoices on time could put your business in financial trouble.

It’s important to note that, while export insurance does cover default and bankruptcy, it may not cover disputed transactions, such as a customer claiming that your goods were not delivered, or were damaged, and refusing to accept them. To get compensation in this case, you may need to obtain a judgment against the defaulting customer, in order to get your insurance company to pay.

Export Insurance Coverage Is Not Cargo Insurance Or Marine Insurance

It’s important to understand that this type of insurance will not insure you against the loss and damage of your products while they are being shipped. This coverage will be provided by a marine insurance company for export trade.

Anyone selling their product overseas and shipping it via an oceangoing vessel should have marine insurance and cargo insurance, to cover and safeguard their short term profits if the vessel is wrecked, fails to arrive on time, or damages their cargo. Export insurance coverage will not be useful, in these cases.

Export Insurance Coverage Is Not Political Risk Insurance

While many companies who sell export insurance coverage also offer political risk insurance, they are not the same thing. Political risk insurance, as the name implies, is designed to help your company maintain profitability if political events unfold which prevent you from being paid.

Your need for political risk insurance primarily depends on the countries in which you’re doing business. If you work as an Australian importer/exporter, and primarily export to countries like the United States, Canada, the UK, or other developed countries, the risk of political violence and business interruption is quite low.

However, in other areas, such as African nations and some Asian countries like India or China, there is more of a risk that your business could be interrupted by regime change, armed revolution, currency and banking issues, and other such political threats.

That’s what political risk insurance is for. Based on your coverage, you can be compensated if a political event unfolds which interrupts your business, or results in a loss or forfeiture of foreign business assets or shipments.

Still Not Sure If You Need Export Insurance Coverage? Ask Us For More Details!

Niche Trade Credit is an experienced insurance broker based in Sydney, and we have more than 15 years of history, helping our clients understand export insurance and related policies, like political risk insurance.

If you’re still confused, or have other questions about export insurance coverage, please contact us right away, and we’d be happy to clear things up, and provide you with all of the information that you need to choose the right policy for your business.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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Trade Credit Insurance Questionnaire

Trade Credit Insurance Questionnaire: The Most Frequently-Asked Questions (FAQs)

As experts in trade credit insurance, the team at Niche Trade Credit can help you get all of the information that you need to purchase a policy – and protect your accounts receivable and short-term profits if one of your customers goes bankrupt or defaults on their debt.

Got questions? We’ve got answers. Check out a few common FAQs about trade credit insurance now.

What’s Covered Under Trade Credit Insurance?

Trade credit insurance is intended to protect you against bad debt, and the risk that your buyer does not pay, or pays very late. Typically, this means that the buyer has been declared bankrupt or insolvent. In most cases, you are also covered if a customer skips out on payment and is no longer possible to find, or a court judgment is issued against them.

Note that, in most cases, trade credit insurance will not protect against buyers who dispute a shipment or a transaction – by claiming that the contract has been violated, or that the goods or shipment were delayed, or damaged upon arrival. It is only designed to protect against non-payment after successful delivery of goods or services.

What Percentage Of Debt Will Be Covered By My Policy?

Typically, somewhere between 70-95% of the debt that you are owed will be paid out to you by your trade credit insurance policy. The specifics of this depend on your policy, and may be higher or lower, depending on what you agree to when purchasing your insurance product.

How Much Does Trade Credit Insurance Cost? How Is The Cost Determined?

The most common range is between 0.1 to 0.3 cents on the dollar, for every invoice or buyer who is covered by the policy. That means, if your business made $10 million per year, your average premium would be somewhere around $20,000.

However, this can vary based on factors like:

  • Creditworthiness of your customers
  • Percentage of debt that is covered by your policy
  • The countries and areas in which your business operates

To get an accurate quote, we recommend you partner with an insurance broker like Niche Trade Credit.

Can I Insure A Domestic Transaction, Or Just Foreign Transactions?

Trade credit insurance is usually used to insure foreign transactions, as it’s harder to obtain court judgments and pursue bad debt across state boundaries. However, it can also be used to insure domestic transactions, if necessary.

What’s A “Discretionary Limit?”

This term confuses many people who shop for trade credit insurance. Essentially, a “discretionary limit” is a way for your insurance company to mitigate risk.

If you have a policy with a discretionary limit of $100,000, you cannot sell more than $100,000 of items to a customer without telling your insurance company. Then, they will conduct credit investigations to determine if the transaction should be allowed. If approved, you may proceed. All transactions under $100,000 would not need approval.

This is simply a way for the insurance company to defray risk, and ensure that you are not extended large lines of credit to companies who have not proven their ability to pay.

Want To Learn More? Contact Niche Trade Credit Today!

Our team has been working in the field of trade credit insurance for more than 30 years. As a leading insurance broker, we can explain every detail about these policies – and answer any further questions you may have. Contact Niche Trade Credit now, and get in touch with one of our experienced trade credit insurance brokers.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.