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Common Credit Insurance Policy Terms and Requirements

As a risk management tool, having a credit insurance policy is an extremely powerful. It protects your cash flow by insuring you against credit risk. When clients or customers fail to pay for goods or services on credit and enter protracted default, trade credit insurance safeguards your working capital – providing compensation for your accounts receivable, and keeping your balance sheet healthy.

This allows you to avoid bad debts in your credit portfolio, and also helps protect you from some political risks when working in developing countries. However, there are some common terms that you usually must abide by when you implement this type of policy at your company. We’ll explain these terms and requirements below.

1. Credit Limits When Extending Internal Credit

As part of your credit management strategy, your company should already be implementing internal credit limits for customers, as this helps ensure your balance sheet is not composed of only a handful of companies.

However, trade credit insurers will require proof and documentation of these credit limits to provide you with a policy. If you do not abide by the stated credit limits of your policy when selling to your customers, you will breach your insurance contract, and will not be eligible for compensation from your trade credit insurer due to bad debts.

2. Rate Of Coverage

Rate of coverage is another important term of most policies you’ll find on the credit insurance market. Insurers are usually willing to insure your invoices for between 70-95% of their cost.

In other words, if you are insured by a trade credit policy and a customer does not pay for a shipment, you can recover that percentage of the debt. The proper rate of coverage depends on what you’re selling. High-margin goods like toys or bicycles can be covered with a lower rate of coverage, while low-margin goods like oil or metals should be insured for a higher rate of coverage.

3. Persistent Default And Debt Collection

Before you can file a claim with your insurance brokers, the debt collection process must begin. The company you’re working with must enter a period of persistent default before you can file a claim. For example, if you sold goods on “net 30” terms, and you have not yet been paid even after 60 days, you can file a claim.

Then, your guarantor, will attempt to collect payment from the non-complying company, usually for a period of up to 6 months after product delivery.

If they cannot secure payment, the firm that failed to pay will be indemnified on the terms of the policy, and your company will receive payment.

4. Payouts Due To Liquidation Or Bankruptcy

Your policy also covers corporate liquidation and/or bankruptcy. If the company with which you have been trading has failed to pay on your credit terms and has been found to be insolvent or bankrupt, you will usually receive compensation from your insurance company within 30 days of filing a claim.

Consult With Us To Learn More About Credit Insurance Policy!

Each insurer is different, and their terms and conditions for insuring your invoices may vary somewhat. So if you have more questions or want to find the policy that’s right for you, we recommend you contact our Niche Trade Credit insurance broker right away. Our experts can help you learn more, and find the right policy.

*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 Experts Think

How Much Is Trade Credit Insurance?

How Much Can I Expect To Pay?

Trade credit insurance is a great risk management tool, which you can use to protect your company from bad debt, protracted default, long debt collection times, and political risk.

Trade credit insurance protects your accounts receivable and your balance sheet, and lets you get paid even if one of your international business partners fails to pay service on credit, or for pay for goods on your specified credit terms. But how much does trade credit insurance cost, and how much can you expect to pay for coverage? In this article, we’ll answer that question. Read on for more details.

What Factors Affect The Cost Of Trade Credit Insurance?

There are a number of different factors which can affect credit risk. Depending on your internal credit management strategy, the cost of trade credit insurance can vary quite a bit.

1. The countries in which you operate – If you operate primarily in countries that are very stable, such as America, Australia, and Western European countries, the cost of trade credit insurance will be lower, compared to the cost of trade credit insurance for companies working in the developing world.

2. Client creditworthiness – Typically, you must prove the creditworthiness of a client before taking out a trade credit insurance policy, and place credit limits on your clients. The more creditworthy your clients are, the lower the risk of default.

3. Total value of invoice/contracts – The total amount of outstanding internal credit that you’ve extended to your clients for your goods and services has an effect on the cost of your trade credit insurance policies. The more credit risk you’ve taken on, the higher the cost will be when looking for a policy on the trade credit insurance market.

4. Percentage of compensation – Depending on your trade credit insurance policy, you may be eligible to get somewhere between 75-100% of the value of the invoice that went unpaid by your client. While a higher percentage of compensation like 90% will help keep your cash flow healthy and minimize losses, it will also cost more to take out a trade credit insurance policy that covers such a high percentage of losses.

While there are some other factors that can affect the cost of a trade credit insurance policy, the ones we’ve listed above typically have the largest effect. Now that we’ve discussed a few of these factors, let’s discuss how much trade credit insurance typically costs.

How Much Does Trade Credit Insurance Usually Cost?

The costs for your company can vary quite a bit – due to the factors listed above – but most trade credit insurers will offer coverage in the price range of about 0.1-0.3 cents per dollar. A business with $20m AUD of invoices, for example, may pay $20,000-$60,000 for a trade credit insurance policy that covers their accounts receivable.

Get Trade Credit Insurance For Less With Niche Trade Credit

With proper credit control policies and a trade credit insurance policy, you’ll never have to worry about protracted default and debt recovery again. Niche Trade Credit is here to help you get the protection you need. As one of Australia’s leading trade credit insurance brokers, we can help you get coverage – and protect your company from unpaid business debts. 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.