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What Happens To Business Debt When A Company Is Sold

If you sell your goods and services on credit terms like Net 30 or Net 60, you may be wondering what happens to your accounts receivable and business debt when one of your customers sells their company.

Selling goods on Net 30 or Net 60 terms can be great for your cash flow, but it may pose some issues if a business is sold, and they still owe you money. A business sale can have some major ramifications when it comes to recovering debts for your small business.

In this guide from Niche Trade Credit, we’ll discuss the basics of what happens to the debt during a business sale.

Understanding The Two Most Common Types Of Business Sale & What They Mean

There are two common types of business sale in Australia, as follows:

  • Stock sale – Stock sales are usually used for larger firms in Australia, as they can be quite time-consuming and costly. In this method of sale, the purchaser will buy all of the assets and liabilities of the business. If a business sold in a stock sale owes you money, the new owner will still owe you that business debt.
  • Asset sale – An asset sale involves the transfer of specific assets and liabilities between a buyer and seller. Some assets and liabilities may be transferred, while others may not be. As you may be able to tell, this can make it very confusing when determining who owes you money.

It’s usually a good idea to try to recover outstanding liabilities and business debts before a company is sold – as it can be more complicated to try to do so after a sale.

How To Protect Your Business When A Customer Is Selling Their Company

When a customer is selling their company, you are personally liable for ensuring that you recover the debts that you’re owed. Here are a few

  • Stay aware of each customer’s status – Make sure that you know how your customers are doing, and keep an eye out for any information that may indicate they are selling their business.
  • Stop extending credit until the business is sold – If the business can afford to pay upfront, it’s best to stop extending them credit until it is sold. This will help avoid complications when trying to collect on business debts.
  • Be proactive about recovering outstanding invoices – If the customer owes you money, be proactive about communicating with the current owner and the new owner of the business.
  • Hire a debt collection service – If you don’t want to take legal action, you can hire a debt collection service to collect your debts, which makes it easier to recover what you’re owed.

Note, also, that if a company becomes insolvent and is not sold, it may also be hard to recover your debts from the business owners. Other creditors, such as lenders with personal guarantees, may have first claim to their business assets during insolvency. The Australian Tax Office may also collect unpaid payroll tax or other taxes during liquidation.

Trade credit insurance can help with insolvency, and also protect you if a company is sold and refuses to pay for past business debts. If a company in Australia or in another country goes bankrupt or becomes insolvent, your insurance policy will compensate you for a percentage of their outstanding debts.

Know How To Protect Your Company From Bad Debt When A Business Is Sold!

If a business is sold – particularly when it’s in financial trouble – it can be hard to recover the money you’re owed if you have been selling on credit. To protect yourself from this situation, you can follow the above tips.

You can also work with Niche Trade Credit to get credit insurance solutions that can protect your accounts receivable – or even hire us to help with debt collection and recovery. To learn more about your options and how to protect yourself, just contact Niche Trade Credit now.

*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 Vs. Trade Finance: What’s The Difference?

If you’re working in the world of export finance, you may be wondering what the difference is between trade financing and trade credit – and what the advantages are of using trade credit rather than other trade finance options.

In this article, we’ll explore the definitions of trade credit and trade finance, and why trade credit is often the best way for smaller-scale importers/exporters to do business. Let’s get started.

Trade Credit Is A Subset Of Trade Finance

The first thing that you need to understand is that trade credit is not separate from trade finance. Rather, it’s a type of trade finance. The term “Trade Finance” refers to the innumerable ways that trade, both foreign and domestic, is accomplished by importers, exporters and other businesses.

Trade credit refers to the extension of short term credit to the exporter, or to the importer of goods, or any transaction where buyers and sellers extend short term credit lines to one another. It’s essentially a short term loan that’s interest free and does not involve any financial institutions, provided by whoever is selling their goods and services.

The common “Net 30” and “Net 60” invoice terms are a good example of this. Once the goods shipped and you’ve created a bill of lading, you can invoice your customer. Then, you can give an exporter time to pay for the goods they want to buy and export, on the basis of payment in 30 or 60 days, with a 2% discount if they pay within 30 days. This type of trade financing helps improve cash flow and working capital.

The buyer has the option to pay right away and save, or to wait, if they need to acquire more funds to complete the purchase. This flexibility makes trade credit an important part of the global supply chain, and the basis for most international trade transactions.

These transactions usually involve working with a credit agency to determine a potential buyer’s credit worthiness. If you’re an exporter, for example, and cannot determine a potential customer’s credit risk, you may ask the importer’s bank or the importer to prepay for the first several shipments of goods when they open an account with your company. Then, as they show the ability to pay on time, you may extend them a longer credit line.

Other Finance Options

Trade finance includes trade credit, but also a variety of other different ways by which an international or domestic trade transaction can be funded, such as:

  • Letters of credit – A letter of credit is a document issued by a bank or another financial institution, and given to a product seller, on behalf of the buyer, guaranteeing payment. If the buyer does not pay, the bank does – and the buyer owes the full balance of payment to the bank.
  • Bank guarantees – A bank guarantee is similar to a letter of credit. It guarantees that, in the event that either a buyer or a seller cannot fulfill their end of the bargain, the bank will pay the required dues, which helps defray risk.
  • Cash With Order (CWO) – In this method of trade, the buyer of any item or items simply pre-pays for their order with cash, at the time of purchase. This is a common transaction method between companies who do not yet have a business relationship.
  • Cash On Delivery (COD) – With COD, the buyer pays upon receipt of the items. This is rather rare in modern trade, for obvious reasons – the buyer could refuse to pay, not have the funds, and so on.

The Importance Of Insurance For Trade Credit Transactions

Compared to other methods of trade finance, trade credit is very simple and flexible. Giving a client an open line of credit makes routine transactions much easier – but without trade credit insurance, you could be exposing yourself to risk.

Essentially, trade credit insurance is a way to defray the risk of giving a company a line of credit. It’s a policy that guarantees that, in the event of protracted default or bankruptcy, your insured accounts receivable will be paid out, based on the compensation schedule laid out in your policy.

This way, even if your clients fail to pay for a shipment or for their goods, you can ensure that your cash flow and your profitability are protected – and that your company can continue to grow. Because of this, trade credit insurance is a very important part way to protect your company.

Learn More About Trade Finance & Trade Credit From Niche TC!

With over 15 years as a trade credit insurance broker, the team at Niche Trade Credit has seen and done it all. If you’ve got any further questions, we can help you gain a better understanding of trade finance and credit insurance solutions. Contact us online now to set up an appointment.

*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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Difference Between Export Credit Insurance Vs. A Letter Of Credit

If you work in the world of exporting and international trade, and you are looking to safeguard goods shipped overseas to your buyers, you may be wondering if you should use a letter of credit, or export credit insurance.

Both of these methods can help minimize payment risks, and ensure that you are paid on time, based on the terms and conditions that you have signed with your foreign trade partner. So, what are the differences – and which one is right for you?

Find out by reading this article. We’ll discuss what you need to know, and how to choose between these two financial products, and ensure that your accounts receivable are safe from bad debt and default. Let’s get into it now.

What Is Export Credit Insurance? How Does It Work?

This is a specialised form of insurance that is typically used in international trade to protect accounts receivable when you extend trade credit to another party.

That is, trade credit insurance is intended to ensure that any invoice you send out to a customer will be paid, even if the customer defaults on the payment, or enters bankruptcy. Depending on your policy, you may be able to insure a single invoice or a single customer, or take out a policy that covers your entire accounts receivable.

The way that export insurance works is simple. If you deliver a shipment, goods, or services to a customer, and they do not pay due to bankruptcy, stop responding to you, or they default on their payment for any other reason, your insurance company will compensate you, up to the limits set by your policy.

You will usually receive between 85-100% of the value of the transaction from your export insurance policy. This ensures that, even if a sale does fall through and you are not paid by the buyer, your cash flow will not be affected, and your business can simply continue operation.

One thing to note is that most export credit insurance policies do have discretionary limits in place, which limit the size of your transactions. Transactions over a certain value must be approved by your insurer, via credit checks, and other checks to verify the legitimacy of a buyer.

What Is An Export Letter Of Credit?

An export letter of credit is another very popular way to safeguard your cash flow and ensure that you are paid by a buyer when your goods or services are delivered. Unlike credit insurance, export letters of credit are issued by banks.

A letter of credit is, essentially, a commitment by a bank to pay your company (the exporter), on behalf of the foreign buyer (the importer). When properly drafted, it is an extremely secure document.

Essentially, the document states that, provided that all of the terms and conditions stated are met (on-time delivery, quality of goods, etc.) the bank guarantees payment by the importer.

These documents are often issued by foreign banks, and can be “confirmed” by an Australian bank. Confirmation means that the letter of credit is not just backed up by the original bank – but also by the Australian bank.

The most common form is called an “irrevocable” letter of credit. This means that, unless both parties agree to a change, the document cannot be changed in any way. Revocable letters of credit may be changed, unilaterally, by either party – so they are much less useful as a legally-binding document.

Once issued, the letter of credit will be “called” as soon as your credit terms are met. For example, if your goods are delivered on “Net 30” terms, and must be paid for 30 days after delivery, the issuing bank will draw and send the funds to you exactly 30 days after the delivery of goods. This ensures that you receive payment in a timely manner.

What’s Right For Me? Export Credit Insurance, Or A Letter Of Credit?

This depends on a number of factors. For a larger transaction with a new customer, a letter of credit can be a good way to develop a business relationship – and make sure you get paid on time by their bank. However, letters of credit can be complex and expensive, and in markets and countries where banking institutions are not always the most reliable,  they may not be enough to guarantee payment.

Export credit insurance, however, will cover your costs for any default or bankruptcy on the part of your client. One benefit of this type of insurance is that, unlike a letter of credit, you don’t need the buyer to be involved in the process of developing and signing – meaning that you don’t need their consent. You can always insure your invoice, regardless of whether or not your customer is willing to sign a letter of credit.

To learn more, we recommend that you contact the team at Niche TC. We can clear up any other questions you may have, and ensure that you get the protection you need with our credit insurance solutions.

*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 A Trade Credit Insurance Discretionary Limit?

If you’re interested in protecting your accounts receivable and engaging in risk management for your company, to protect yourself from bad debt, political risks, or other issues with an export transaction, you may be interested in trade credit insurance from a large insurance group.

Credit insurance services protect your cash flow and profitability if a customer who buys goods or services fails to pay due to protracted default or bankruptcy. If this happens, your insurance company steps in, and compensates you for this loss.

One of the terms you may have seen while trying to decide if a product from an insurance company is “discretionary credit limit.” If you’re wondering what this means, read on, and find out.

Understanding Trade Insurance Discretionary Limits

Unless you choose to insure a single invoice or customer, most insurance companies will insure all of your invoices and accounts receivable, with the fee calculated as a percentage of the total outstanding debt. This figure is also affected by the creditworthiness of each client.

Using credit control management tools and internal credit management processes, your insurance company will likely set what’s known as a “discretionary credit limit,” which will be outlined in your insurance product disclosure statement.

This limit is the maximum amount of business that you can do with any single buyer, without the formal approval of the insurer, and it’s also subject to the obtaining of satisfactory credit references.

In essence, a trade insurance discretionary limit is meant to make sure that you do not issue lines of credit to larger debtors, over an amount agreed upon in your insurance contract, without first consulting with the insurance company.

To boil it down into simple English, any transaction that is made over your discretionary limit – and without consulting your insurance provider for credit approval – may not be covered under your trade credit insurance policy.

What’s The Purpose Of A Trade Insurance Discretionary Limit?

Your insurance company has only agreed to take on a certain amount of risk for your accounts receivable – based on factors like your average transaction value, the countries in which you operate, and your percentage of coverage.

Because of this, their business could be endangered if a company starts issuing large lines of credit to companies which could be risky, or do not have a history of timely payment.

The trade insurance discretionary limit is meant to help mitigate that risk, by setting forth guidelines about how much credit a vendor or exporter can issue, without the express approval of their insurer.

What If I Need To Exceed My Trade Insurance Discretionary Limits?

As your company continues to grow, you’re likely to have issues with your discretionary limit, as your sales volumes get larger. But these are easily solved.

When a large transaction must occur, you simply must contact your insurance company to approve the invoice and the transaction, based on your customers’ creditworthiness.

In addition, as your company grows, your insurance company may choose to expand your discretionary limit, particularly if you have not had to file any claims recently. This gives you more business flexibility.

Got More Questions About Discretionary Limits? We Can Help!

We understand that navigating the world of trade credit insurance isn’t always easy. But at Niche Trade Credit, we’ve been experts in the field for more than 30 years. We can clear up any other questions you have about discretionary limits, and help you find the right trade credit insurance policy for your business. Contact us today 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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What Is Credit Risk Exposure

To understand what credit risk exposure is, we first need to understand exactly what credit risk itself is. Credit risk is the risk posed to a company if a third party client they loan to does not honor an agreement, usually the repayment of money. Credit risk exposure is the total and maximum amount of money you could lose if all your third party clients fail to honor their payment agreements. This credit exposure is often calculated in relation to specific types of agreements such as repayment loans or long-term contracts.

Understanding your credit exposure is part of risk management for your business. Once you have conducted an audit on your core operations and identified your default risk, you are able to take steps to ensure the security of your company and reduce your credit risk exposure.

Client Selection

Careful client selection is the first step in monitoring and reducing credit exposure risk. It is important to limit and lower your risk by conducting a credit analysis on potential clients prior to selection. Look for clients with higher credit ratings as they will be more likely to uphold their agreement and repay the loan. This does not mean that you should not take on clients with low or no credit rating, rather use this information to tailor the loan agreements you offer to them.

Controlling Credit Exposure

Controlling your credit risk exposure is critical, especially now in such uncertain economic times. A common way to reduce risk is to introduce penalties and new loans with a higher interest rate. These measures aim to deter clients from missing a payment and mitigate the loss that may arise from a potential missed payment. This particular method is often utilised by banks, however there are a number of other ways lenders can control their risk exposure.

Setting credit card limits or altering the principle and interest amount based on the clients expected likelihood to repay the sum owed is another example of this. This may take form by offering a reduced loan to a student with no credit history, or offering a high value loan to a client with an excellent credit rating. Utilising this method will enable you to reduce your credit exposure risk by lowering individual credit risk of certain clients.

Purpose of Credit Insurance

Some risk is inevitable, that’s just the name of the game when it comes to business. Recent months have shown just how unpredictable the economy can be with many businesses falling victim to the devastating effects of the Coronavirus. It is more important than ever to ensure your business is protected against the unknown.

Studies have shown that the majority of business failures are not due to lack of sales or opportunity, rather due to poorly managed cash flows and increased credit risk. Many business owners have found themselves ignoring cash flow and credit risk in favour of focussing on revenue and sales. While this problem may directly affect your clients, it will indirectly affect your business if you do not have adequate measures in place to protect yourself from credit default.

Credit insurance is the best and safest way to ensure your business is protected against concentration risk and counterparty credit risk. Your business may also be exposed to commercial risks such as if your clients are unable to pay within the agreed time frame, or become insolvent. In these cases your insurance will cover things such as the standard services or goods that are sold.

Credit insurance plans are customisable and can be tailored to meet the specific needs of your business including risks such as binding contracts and works in progress. Credit insurance is vital for businesses of any size to help protect their cash flow and ensure the business is able to continue trading with no issues.

Get Serious About Protecting Your Business

Niche Trade Credit has over 30 years experience in credit management and credit insurance services. If you are serious about protecting and growing your business, contact us today on 02 9416 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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Trade Credit Insurance Vs. Factoring

If you’re part of a business that has many international clients, you’re probably somewhat familiar with trade credit insurance and factoring. But you may be a bit confused about the difference between the two, how they are related – and how they’re different.

In this article, we’ll explain all of the basics, to help you understand the differences, and what may be right for you, to protect your accounts receivable and make sure you get paid on the due date of your invoice.

The Basics Of Trade Credit Insurance

Trade credit is, essentially, the credit line that your company extends to another company when they purchase your goods or services. If you bill someone on “Net 30” or “Net 60” terms, and they have 30-60 days to pay you, you’re extending them a line of credit.

You can incentivize your clients to pay by offering small discounts – such as a 2% discount – for paying within a certain time period. However, if your client does not pay, what happens?

If you do not have this type of insurance, you may have to send this bad debt to a number of collections services, and try to get the money you’re owed from your client. But this can take quite a bit of time, and you may never get the full amount you’re owed.

This is what trade credit insurance companies are here for. Ths type of insurance is used for credit protection. Essentially, you take out a policy on your invoices. Then, if an invoice is not paid for some reason, the insurance company will pay you a percentage of that invoice’s value – based on the premiums and coverage you’ve negotiated.

Understanding Factoring

While credit insurers insure you from a client who refuses to pay, a factoring company gives you a way to get working capital for your company, by using your outstanding invoices as collateral.

Wondering about the basics of how factoring works? Basically, a factoring company will buy your invoices for a set percentage of their value – usually around 80%. You’ll get that money immediately.

Then, once your invoices have been paid to the factoring company, you’ll get the rest of their value – minus any applicable fees. This may sound somewhat similar to trade credit insurance, but it is not – for one big reason.

Factoring Usually Does Not Protect You From The Risk Of Non Payment

The big difference between trade credit insurance and factoring is that factoring is not a way to protect yourself from the risk of non-payment. This is because most factoring companies use “recourse factors.”

A recourse factor agreement states that, once the terms of the initial invoice have eclipsed and the debtor refuses to pay, you must purchase that invoice back from the company – and your credit department must continue pursuing the debt on their own.

It is very rare to work with a company that does not use recourse factors. Those that do offer non-recourse factoring typically charge an extremely high fee – and they only pay for bad debt if it’s caused by bankruptcy. If the client simply refuses to pay or disappears, you still have to buy back their invoice from the factoring company.

Essentially, you cannot hope to get rid of bad debt by offloading it onto an invoice factoring company.

When Should I Use Trade Credit Insurance Or Invoice Factoring?

If you are worried that your invoices won’t be paid – because you’re exporting to a newer company, or because you’re working in a politically unstable region – trade credit insurance is what you’ll want. Even if your client never pays you for your goods or services, you’ll be able to recover most of the value of the sale, and ensure your business stays in good financial shape.

In contrast, invoice factoring should be used when you’re sure that your clients will pay eventually – but you’re having short-term cash flow problems. Maybe you’ve got a few dozen Net 60 invoices out there, but you need to make payroll and invest in some upgraded equipment within the next month.

By using a factoring company, you can access the money you’re owed more quickly, and use it for mission-critical operations and other business needs. Just don’t think that you’ll be able to “dump” bad debt with invoice factoring – The use of recourse factors mean that this is simply not possible.

Learn More From Niche TC Now!

If you’re running a business in Australia, and you need tarde credit insurance, Niche TC is the best choice.

To get more information about our services, and get a quote for your company, please get in touch with us online right away, or give us a ring at 02 9416 0670.

We’d be happy to continue this discussion with you in-person, and help you develop a deeper understanding of the benefits of trade credit insurance services.

*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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Why is Insurance Important in Trade?

Commercial trade insurance is critical for businesses in today’s competitive global economy. Insurance for trade and commerce enables businesses to create a robust risk management policy, while trade credit insurance protects them from customer bankruptcy and instability that can occur in foreign countries. There are several different types of insurance for trade and commerce that protect companies from specific issues and circumstances. Below, we’ll discuss the importance of insurance for trade and what the different types of insurance are for commerce. 

Trade Insurance Gives Organisations Financial Stability

Overall, credit insurance is critical for protecting a company’s bottom line from financial and organisational instability. Liability issues can quickly arise and lead to bankruptcy for the business and the owners. Entrepreneurs and startups should be aware of the importance of trade insurance before they start a business.

  1. Liability Insurance

Legal action from suppliers, business partners, and customers can expose a business to a range of risks, including bankruptcy. Liability insurance aims to protect companies from these specific risks that arise when someone tries to sue the business. Liability insurance is further broken down into several types:

  • General Liability: This type of liability insurance protects a company from financial obligations that happen because of negligence, personal injury, property damage, and other risks. 
  • Product Liability: Product liability insurance protects a company from financial issues that happen if someone is hurt because of a company’s unsafe or faulty product. 
  • Errors and Omissions: Errors and omissions insurance protects businesses from malpractice claims against clinicians, specialists, consultants, and other medical personnel. 

Without these types of liability insurance coverage, a business owner is personally liable for these types of litigious debts. Without trade insurance, a business owner could have their personal credit destroyed from litigation. 

  1. Property Insurance

If a business owns buildings, a company must have commercial property insurance coverage. Companies that rent their office space will also need renters insurance, another type of property insurance. These policies will protect a business from financial problems that happen if a fire breaks out, or if a building experiences hail or water damage. Property insurance also protects a business from economic issues that occur from acts of vandalism. 

An insurance broker may also encourage a business to purchase a peril-specific policy. This covers an individual business from certain risks that they may be more likely to experience. These policies also allow companies to exclude a high-risk item or items from an all-risk insurance policy. 

  1. Commercial Auto Insurance

For businesses that use vehicles as a part of their operations, they must be protected with commercial auto insurance coverage. Any productive vehicle, such as a delivery truck, company car, or construction vehicle that is critical for the company’s operations can be covered in these policies, which protect the business from liability if the car or truck causes property damage. 

  1. Employment-related Insurance

Workers’ compensation and unemployment insurance are essential to have for businesses that employ workers. Workers’ comp pays out claims if someone is hurt on the job. With unemployment insurance, the company is covered if an employee files for unemployment benefits. 

Niche Trade Credit is one of the most professional, dynamic, and trustworthy Specialist Credit Insurance Brokerages in Australia. We’ve been serving and protecting businesses from a range of liability issues for more than 30 years. Contact us today and see why business owners trust us with their insurance needs. Give us a call today 02 9416 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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Credit Insurance Vs. Bank Guarantee

When it comes to satisfying payment obligations for international trade, there are a number of different ways you can ensure the proper payment for your goods or services – like a letter of credit, performance guarantee, bank guarantee or credit insurance.

Of these, credit insurance and bank guarantees are two of the most popular ways of guaranteeing payment. However, they differ quite a bit in how they work, their terms and conditions, and more.

In this article, Niche Trade Credit will look at the differences between credit insurance and a bank guarantee, and explain how they differ from one another.

Understanding A Bank Guarantee And How It Works

Essentially, a bank guarantee is a guarantee by a particular lending institution to cover the full amount of a loss in the event of a borrower defaulting on a loan. These guarantees are often used in international trade, as they help eliminate the risk of non-payment.

Because of the general nature of a bank guarantee, lenders can issue bank guarantees of many types. A few common types include:

  • Payment guarantee – A payment guarantee ensures that a buyer will pay a seller on a particular date.
  • Advance payment guarantee – This acts as collateral for the buyer, allowing them to recover advance payment from a buyer if the goods or services supplied do not meet the specifications outlined in the contract.
  • Performance bond – A performance bond serves as collateral that will cover a buyer’s costs if the services or goods provided by a contractor do not meet its contractual requirements.
    For example, in the event of a contractor failing to meet its contractual obligation to deliver steel of a particular grade, a performance bond would compensate the buyer for the loss incurred by the event. 

Though there are many different types, they all have the same basic purpose – to protect companies from the risk of default or a failure to provide the specified goods and services and fulfill contractual obligations.

Understanding Credit Insurance And How It Works

Credit insurance is offered by an insurance company, and is much more simple and straightforward, compared to bank guarantees.

Credit insurance, also called “trade credit insurance,” is intended to protect providers of goods and services from nonpayment. For example, if you sell $1 million of items to a customer on net 30 terms and they fail to pay, your insurance policy will compensate you once the debt enters default.

Usually, unlike a bank guarantee, credit insurance policies do not compensate you for the full value of the owed money, but for a set percentage – usually 75-95% – of the invoice amount.

In most cases, credit insurance is the simplest and most affordable way to protect your accounts receivable against debt. Whether you’re working with customers who have high credit risks, extending credit to companies in foreign countries, or simply want to protect your cash flow from bad debt, credit insurance can be very useful.

Know The Difference Between Bank Guarantees And Trade Credit Insurance!

Depending on the type of trade you engage in and the goods and services you provide, either trade credit insurance or a bank guarantee may be right for you. 

Need help deciding? Want to find the best credit insurance solution? Contact Niche TC today. As a leading Australian broker for more than 30 years, we can provide you with all of the information you need to make the right decision.

Get in touch today on 02 9416 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 a Political Risk Insurance Breach of Contract?

Is your business engaging in cross-border trade with a developing country? While emerging markets can offer companies unique opportunities, they aren’t without their risks. Companies with overseas operations in emerging markets are exposed to political violence and financial crisis that can leave their business at risk of asset and income loss. When you work in a country that is at risk of civil disturbances and government upheavals and instabilities, you must protect your company with political risk insurance. 

What is political risk insurance?

Political risk insurance is a type of investment insurance that protects a business from the risks associated with conducting operations in emerging markets. The company is protected while doing business either in the host country or with the host government. Companies are protected from loss of income when sovereign financial obligations aren’t met.  A company’s assets that are held overseas, such as construction equipment, are also covered from damage in the event of a war, rebellion, or other political violence. 

Where can a business get a political risk insurance policy?

A company can get a policy from private insurers and export credit agencies like Niche Trade Credit. It’s also possible to obtain coverage from a state-owned organisation, or an investment guarantee agency MIGA, or the World Bank Group. An investment insurance company and a multilateral investment guarantee agency can also provide businesses with political risk insurance policies. If you already have a political risk insurance policy or are looking into getting trade insurance coverage, you may be wondering when political risk insurance covers a breach of contract. 

What is a breach of contract?

A contractual breach can trigger your political risk insurance policy to cover losses that happen from a breach of contract. In most cases, companies will need to obtain compensation for damages that occur when the failure to honour sovereign financial obligations occurs. If a host government does not honour their financial commitments to your company, that is considered a breach of contract and is covered under political risk insurance. The insurance company will compensate the business for any losses incurred from this type of contract breach. 

Sometimes, contracts are breached in other ways that are also covered under political risks. For example, the host country could seize your property, otherwise known as expropriation. They could make your company’s operations illegal, or take other actions that violate the conditions of your original contract with them. This would also constitute a breach of contract and would be covered under your policy. But it’s critical for the health and viability of your organisation that you choose the correct political risk insurance for protection from breach of contract issues. 

When you choose a policy, you want to make sure that it covers your business against all types of political risk and foreign instabilities. For example:

  • Wars and acts of terrorism
  • Political violence and rebellions
  • Currency inconvertibility 
  • Expropriation
  • Breach of contract

Every business is different, and so is its liability and risk profile. When it comes to choosing the right political risk insurance for your company, you’ll need to speak to a political risk insurance professional.

An insurance professional can accurately assess the short, medium, and long-term risks your company faces in a developing nation. Also, insurance companies who specialise in underwriting political risk insurance policies will consult with insurance professionals who are experts at the political risks that can arise in specific nations. Contact the insurance experts at Niche TC today to learn more about how political risk insurance can protect your business. Call us today 02 9416 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

Understanding A Political Risk Insurance Sample Policy

If you’re working in any country where there is a risk of political instability, and your assets or products could be at risk, insuring yourself with a political risk insurance policy is likely a good idea.

But what’s included in political risk insurance? Will you be covered in every situation? Can you add additional coverage to a specific contract or for a particular country?

These are all good questions. So, in this article, we’ll discuss everything you need to know about political risk insurance, based on a political risk insurance sample policy.

Understanding What’s Covered

Each insurance policy is designed specifically for the needs of a single company. However, a political risk insurance sample policy may include the following coverages:

  • Breach or frustration of contract – If a contract is breached or frustrated by a foreign government, you will be compensated for the lost revenue and income. For example, if you delivered a shipment of drones to a government and they refused to pay, you would be covered.
  • Political violence – This coverage protects your business from losses incurred by war, political unrest and instability, violence, civil war, and other such instances of political violence.
  • Expropriation of private property – If your property or infrastructure is seized by a foreign government, your insurance policy will compensate you for the value of the lost assets.
  • Business interruption – Loss of licensure, interruptions of business due to civil unrest, and other such interruptions of revenue are typically covered by a political risk insurance policy.
  • Foreign currency and banking issues – Issues with moving foreign currency to your own bank, converting it, hyperinflation, or seizure of your currency by a central foreign bank all may be covered in your policy.
  • License suspension – Should your import/export license be suspended, you may be compensated for the value of the shipments you lost or could not deliver, due to this suspension.
  • Government defaulting on payments – If a foreign government fails to repay its debts to you, based on your contract, the insurance company will compensate you for a percentage of the lost sale.

There can be more specific coverage, based on your own needs, but these are the most common types of coverage included in a political risk insurance sample policy.

Limitations Of Coverage

In general, any covered incident occurring will result in you being paid for the loss by your insurance company. But what’s important to understand is that, in most cases, you will not receive compensation for the entire loss – but for a percentage, as set forth in your policy.

Premium Costs And Your Obligations

The premium of your political risk insurance coverage depends on a number of different factors.

  • Value of contract or goods – The more valuable a contract is, the more it will cost to insure it
  • Percentage of contract that will be paid out – You may be able to lower your premiums by agreeing upon a lower percentage that pays out upon your loss, such as 70%, rather than 85%.
  • Location in which you’re doing business – A higher-risk country will require a more expensive policy, due to the increased risk of political instability.
  • Creditworthiness of the client/government – Even in an unstable country, premiums and rates for a client or government with a history of timely payments may be lower, because there is a lower risk of default and non-payment.

See A Political Risk Insurance Sample Policy For Yourself!

Above, we’ve simply outlined the main components of a political risk insurance sample policy. If you’d like to dive deeper, the team at Niche Trade Credit would be happy to help!

We’ve been working as political risk insurance brokers for almost 20 years. Contact us now, and we’d be happy to provide you with a political risk insurance sample quote, and help you understand how much you can expect to pay for coverage.

*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.