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What Experts Think

How To Underwrite Trade Credit Insurance

Are you wondering how an insurance broker will underwrite a trade credit insurance policy? This type of policy is a great safety net that helps protect your company from political risks and bad debts/protracted default if clients fail to pay, and eliminates the need to hire debt collection services.

The way it works is simple – if your clients do not pay for your services according to your payment terms, your trade credit insurance policy will compensate you. This credit management tool lets you protect your accounts receivable and your working capital when customers fail to pay for your goods or services. But how do you underwrite these policies? Let’s take a look at some essential steps in the process now. 

  1. Each Of Your Clients Will Be Underwritten Individually

Your trade credit insurance provider will work with your small business and get a list of clients. Then, using a risk management tool, it will assess the risk of each client individually – and determine the likelihood that they will default. 

Then, the cost of insuring all of your clients will be put together in a credit portfolio. This is one of the biggest factors that determines the cost of your trade credit insurance policy. 

  1. A Limit Will Be Placed On Each Client’s Purchases And Credit

As part of your policy, your underwriter will place credit limits on your clients. This ensures that when your company sells goods to a buyer, you do not expose yourself – or your insurance company – to excessive risk. If you fail to abide by these terms, your policy may not protect you from default.

  1. Your Trade Credit Policy Will Outline What Happens When Clients Fail To Pay

Trade credit insurance protects you when your clients don’t pay. But every business is different. Your underwriter will work with you to develop a policy and outline what happens when a client fails to pay, including the time frame for seeking compensation, forms and processes that must be done to file a claim, and more. 

  1. Your Underwriter Will Work With You To Determine Covered Events 

Your underwriter will work with your company to determine what coverage should be provided – such as political risk insurance, and pre credit risk to protect you if a client defaults before your project is completed, or breaks the terms of your contract.

  1. You Will Work WIth Your Underwriter To Determine Your Percentage Of Compensation

Usually, a trade credit insurance policy does not compensate you for 100% of your losses – but for a set percentage, such as 75% or 85% of your loss.

The percentage of coverage you choose has a big impact on the cost of your insurance premiums, so you’ll work with your underwriter to determine what percentage will work to protect your finances – but still provide you with a reasonable cost for your policy. 

  1. You Will Accept Your Policy And Coverage Will Begin 

Once your underwriter completes your policy, you will accept it and your coverage will begin. Then, you can get peace of mind – knowing that your business is protected even in the event of default!

Need Help Learning About Trade Credit Insurance? Contact Us!

Still need more information about trade credit insurance? At Niche Trade Credit, we’re a leading provider of trade credit insurance brokerage services in Australia – and we can help you find an insurance underwriter that’s perfect for your company. Give us a call today on 02 8416 0670.

*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

What Is Pre Credit Loss In Credit Insurance?

If you are interested in an insurance product like trade credit insurance as a way to simplify risk management and protect your balance sheet from protracted default, you probably have quite a few questions.

For example, what is a pre credit loss? What does it mean – and why do you need a policy that includes pre credit coverage? In this article, we’ll discuss the basics of pre credit loss in credit insurance, and why it’s important for credit management, avoiding bad debt and protecting your cash flow.

Defining Pre Credit Risk

Pre credit risk is, essentially, the risk that your buyer will cancel or will be unable to honor the contract terms before your products are delivered. 

For example, if you create and manufacture a custom product that has a six-month production time, and your buyer goes bankrupt before the products can be delivered, this is a pre credit loss. 

The same is true of products that can no longer be shipped due to political risk, such as civil unrest or banking issues. These are also covered in the terms of pre credit risk insurance. 

Without working with insurance companies for pre credit risk insurance as part of a trade credit insurance policy, you may find yourself in a difficult situation where your buyer cancels the contract, but you are unable to get compensation for your products.

Pre Credit Loss – Losses Caused Before Delivery Of Goods/Completion Of Contract

There will typically be a waiting period of about 30 days before you are compensated. This may vary based on your insurer. Trade credit insurance policies typically will reimburse you for all working costs and losses you sustain as a result of the pre credit loss, including:

  • Production costs
  • Net of profit margin
  • Advance payments which you cannot recoup due to the buyer cancelling the contract

Usually, however, you will not be compensated fully, but with a payment calculated as a percentage of your loss. For example, your trade credit insurance policy may compensate you for 85% of your loss, as outlined in your policy, within your credit limit for the particular buyer.

The Importance Of Pre Credit Insurance Coverage

So, why is pre credit insurance such an important part of trade credit insurance, and a valuable method of credit management? Here are a few reasons it’s such a useful insurance product.

  • Reduces risk of taking on long-term projects – With pre credit insurance coverage, you can take on long-term manufacturing projects without worrying about your buyer defaulting – reducing risk and allowing you to take more complicated projects from your buyers.
  • Protects your cash flow – You won’t have to worry about losing money due to buyers breaking your contract – your cash flow will be protected and you’ll be compensated for your losses.
  • Comprehensive coverage – Pre credit insurance coverage doesn’t just compensate you for your profits, but also for costs incurred when designing, developing, manufacturing and transporting your products – and more. 

Learn More About The Benefits Of Pre Credit Loss From Niche Trade Credit!

At Niche Trade Credit, we specialise in providing our customers with the insurance they need to protect their businesses in Australia. As a leading trade credit insurance broker, we can help you understand everything you need to know about trade credit insurance – and pick the policy that’s right for you. Contact us now to get started, by calling 02 8416 0670.

*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.