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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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What Experts Think

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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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.

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Advantages and Disadvantages Of Export Credit Insurance

Export credit insurance, often also known as trade credit insurance, is a useful way to insure your accounts receivable. But is it right for you? Many alternatives exist, such as invoice factoring and letters of credit issued by an export/import bank, as well as some other forms of insurance for exporters.

So, in this article, Niche TC takes a look at advantages and disadvanatges of export credit insurance, to help you determine if it’s right for you.

The Advantages Of An Export Credit Insurance Policy

Export credit insurance has benefits not just when working in foreign markets and with a foreign buyer, but even for companies who do most of their business domestically. Here are a few of the advantages of taking out a policy.

  • Peace of mind – You’ll know that, even if you cannot convert on your foreign receivables, you’ll be compensated for the value of these accounts. This minimizes your credit risk, and protects your company.
  • You can expand more quickly – Without an export credit insurance policy, working with foreign or new companies is very risky. But with a policy in place, your risk is minimized, allowing you to gain new customers quickly.
  • Protect your most critical accounts – If your company would be devastated by a single one of your clients going out of business, taking out an export credit insurance policy can help you ensure that your business remains functional and stable.

The Disadvantages Of An Export Credit Insurance Policy

Despite its many benefits, export credit insurance may not be necessary for your company. There are a few drawbacks and disadvantages of taking out a policy for this type of insurance.

  • It’s not available for some high-risk accounts – In most cases, a trade credit insurance policy will not cover accounts that have a very high credit risk. Or, if they do, the fee will be very high. This means you’ll pay much more when working with these companies.
  • Doesn’t cover every non-payment situation – While bankruptcies, defaulting, and things like political unrest or turmoil are usually covered by an export credit insurance policy, things like slow payment or late payment, and customer disputes or claims that products are in poor condition or incorrect are not covered.
  • Exclusions and limitations vary – You’ll want to work with a reputable trade credit company, and make sure you understand all of the limitations and exclusions related to your policy. Understanding this information can be quite difficult, in some cases.

Is Export Credit Insurance Right For You? Find Out With Niche Trade Credit!

There are many factors that affect your need for export credit insurance – including the size of each client you have, the amount of credit you typically extend, the international countries in which you’re expanding, and the relative stability of the industries in which your clients or customers work.

So, how do you know if you need export credit insurance? We recommend contacting Niche Trade Credit now. Our team of experts can help you understand whether you need a policy, and which type of policy is right for your company. 

*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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How Much Does Export Credit Insurance Cost?

If you want to minimize your credit risk and bad debts when extending lines of credit to your customers, export credit insurance – also called trade credit insurance – is a great option.

Export credit insurance protects you from protracted default when foreign buyers fail to pay for your product or services, and helps cover the cost of debt collection when your buyers do not pay. If you cannot recover your funds from a single buyer, your insurance company will repay you, and cover the cost of the unpaid invoice.

So, how much can you expect to pay insurance companies if you want to protect yourself when conducting international trade? Let’s explore this subject in detail below.

Understanding The Average Cost Of Export Credit Insurance

As a rule, this type of risk insurance is calculated as a percentage of your overall invoices/accounts receivable. Currently, short term export credit insurance rates are usually hovering around 0.1-0.3 cents per dollar.

In other words, if your company has a total annual revenue of around $50 million AUD, you could expect to pay somewhere between $30k-$100k in insurance premiums to cover your accounts receivable.

This is just a rule of thumb, of course. Depending on your credit terms, the countries in which you operate, and other factors, the cost can vary.

What Affects My Export Credit Insurance Rates?

Many different factors can influence the cost of your export credit insurance policy. Here are a few of the most common such factors.

Total cash flow and outstanding invoices – The more credit you’re extending, the more your policy will cost. This is particularly true if you mostly extend credit to a handful of companies, and have high credit limits for each company.

Countries of operation – Companies working in developed countries, like America or Australia, face fewer political risks, compared to those mainly exporting to the developing world, and this can affect the cost of export credit insurance.

Creditworthiness of clients – Your insurance company will conduct due diligence on all of your clients, to ensure that they are likely to pay their invoices. Companies that have poor credit management and have defaulted or failed to pay in a timely manner in the past could increase the cost of your policy.

Percentage of compensation – This refers to how much of the value of an invoice you are eligible to recover when a client defaults. If your percentage of compensation is 70%, for example, you’ll get 70% of the value of the invoice from your insurer in case of nonpayment. A policy covering a higher percentage – 95%, for example – will be correspondingly more expensive.

How Can I Find The Best Rate For Export Credit Insurance?

The best way to find a great rate for export credit insurance is to shop around – there are many different trade credit/export credit insurance companies working in Australia, and you may be able to save money by comparing their rates.

Need help? Contact Niche TC now! As a leading Australian trade credit broker, we can help you compare policies from different insurance companies, and choose the one that’s right for you. Get started today, and get more information from our experts.

*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 The Relationship Between Trade Credit and Factoring

If you run a small business, and you’re interested in learning more about trade finance, you’re in the right place. In this article, Niche Trade Credit will take a deep look at two of the most common financial tools used by small businesses, especially those involved with importing, exporting, and global trade: trade credit and invoice factoring.  Let’s get started, discuss these two financial instruments, and talk about how they relate to one another in the world of international trade.

The Basics Of Trade Credit – Credit Extended Between Two Partner Companies

Trade credit is one of the most simple forms of credit in use today, and is typically extended from one merchant or supplier to another partner company. Essentially, it is a business-to-business (B2B) agreement, in which a customer can purchase goods that they need for their business on an account – without paying cash up front, and paying the supplier at a later date.

The commonly known “Net 30” agreement, when a customer has 30 days after the purchase of goods to pay for their delivery, is a form of trade credit. In some industries, 60 or 90 day terms are more common, which allow for increased flexibility.

So, to boil it down, trade credit is the credit that one company extends to another for the purchase of goods and services. Why is this done? It has a few benefits for both parties.

The party issuing the credit may incentivize the partner company by offering them favorable repayment terms if they pay within a certain time. For example, they may get a 2% discount on a Net 90 contract if they pay within 30 days, and a 1% discount if they pay within 60 days. This encourages companies who can pay right away to do so as soon as they can.

The other benefit – for both parties – is that it increases business flexibility, and helps encourage short-term growth. The company purchasing the goods has more time to sell them and recoup the money necessary to pay. If cash flow is good and business is booming, they can pay early and save money – or wait, if things are slowing down and they need more time.

Because of this, the company issuing the credit is able to profit from a relationship with a new customer, while the company to which credit is extended is able to benefit from better cash flow, and a more flexible repayment strategy.

One important thing to note about trade credit is that the company offering the credit is vested in the success of the company to which credit is extended – as their continued profitability is usually important to both parties.

Because of this, trade credit contracts are often much more flexible than bank loans or any other type of credit. However, there can still be penalties and fines applied if a creditor does not repay the line of credit by the agreed-upon time.

Understanding Invoice Factoring – Enhance Cash Flow, Get Working Capital

Invoice factoring (also sometimes known as receivables factoring) is a type of debtor financing, used to purchase accounts from a company, in return for a cash lump sum. This can be a good way to get quick cash, even if you have bad debt on your books – like a number of clients who are not paying you in a timely fashion, despite owing you money for exporter receivables, for example.

Essentially, invoice factoring allows you to sell all of your outstanding invoices for a percentage of the face value of the invoice. The factoring company pays you this money immediately, and will pay the remaining percentage – minus applicable fees – when the client pays them. By doing so, you can get cash for the money you’re owed immediately.

What you’re doing when you perform invoice factoring is selling your accounts receivable for immediate payment – and turning over responsibility for payment collection to the factoring company. This lowers the risk of late payment, and shifts the risk of bad debt onto the invoice factoring company. Invoice financing is often used by companies to trade receivables for immediate cash if the business is having cash flow issues.

Another important factor to know about when learning about invoice factoring is the concept of recourse factoring. In most cases, any company offering invoice factoring will use recourse factoring, to protect their company from the risk of non payment and bad debt.

Recourse simply means that there is an understanding between you and the invoice factoring company that you will buy back any receivables for which the factoring company cannot collect payment. In essence, you, the client, are responsible for covering the cost of any invoices that are not paid by your customers.

The vast majority of invoice factoring transactions include this stipulation. Non-recourse factoring is rare, and this type of receivable financing is typically only offered to companies who have clients with an excellent payment history.

In addition, non-recourse factoring is typically more expensive, and it does not necessarily protect your company from the risk of non-payment. This is because most factoring companies who offer non-recourse factoring apply it only in cases of bankruptcy – if the client simply doesn’t pay, or disappears without paying, you must still buy the invoice back from the factoring company.

How Do Trade Credit And Invoice Factoring Relate To One Another?

Trade credit and invoice factoring are deeply linked – because when you sell your accounts receivable, you’re essentially transferring a contract to another party, and receiving a lump sum payment from them for the invoice.

This is a good way that companies who offer long repayment terms for trade credit – 60, 90 days or more – can get more cash for their company’s day-to-day operations, even if most customers are waiting for the maximum period of time to repay.

Learn More From Niche Trade Credit Now!

We’re one of the leading insurance companies in Australia when it comes to credit insurance services – and if you have questions about invoice factoring, trade credit, or any other related subject, we’d be happy to help you learn more. Interested? Contact Niche TC 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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What Experts Think

Understanding A Sample Trade Credit Insurance Policy

If you’re thinking about purchasing a trade credit insurance policy, you may have some questions about what’s covered.

If so, you’re in the right place. In this blog, we’ll consider a sample trade credit insurance policy, and discuss the different coverages that are available, what you can expect to pay, and more details.

Sample Coverage For A Trade Credit Insurance Policy

First, let’s discuss what events are actually covered by the trade insurance policy itself. Policies are designed to aid in risk management and ensure you can trade with confidence when extending a line of credit to a buyer, whether in international trade or domestic trade.

This is accomplished by insuring your accounts receivable from bad debts, and ensuring your cash flow remains stable and steady. They will pay out if:

  • A customer or client becomes insolvent, bankrupt, or otherwise is unable to pay
  • A customer or client becomes impossible to contact and does not pay, or a court judgment is issued against them

This helps ensure that you are paid for your goods and services issued on trade credit. Depending on your policy, you may be compensated for between 75-95% of the value of the debt.

In addition, many trade credit policies are also sold with political risk insurance. This type of insurance is similar, but it protects you from political risks such as:

  • The expropriation or seizure of your assets by a foreign government
  • Political violence (war, insurrection, terrorism, etc.)
  • Banking and currency conversion issues or inability to move currency to your country
  • Breach of contract or contract frustration by a government
  • Business interruption

Additional Benefits Granted By This Policy

One of the additional benefits granted by most policies is that, if you need to take legal action against a client who has not paid, these costs will be covered by your insurance policy. The cost of hiring a debt collection service and other related fees may also be covered by your policy.

Limitations Of Coverage

The specific limitations of your policy will vary, based on the policy you purchase. However, it’s important to note that most policies will not cover customer disputes which result in non-payment.

For example, if you deliver a $100,000 order to a customer, and they claim that the items were missing, damaged, or not satisfactory, and they do not pay, you cannot simply turn to your policy for compensation. You must engage in arbitration and negotiations with the customer, and go through the proper legal channels to resolve the dispute.

Trade Credit Discretionary Limits

When you purchase an insurance policy, your insurer will likely give you a discretionary limit. This limit outlines the maximum business credit limit you can issue to a customer without getting approval from your insurer.

In other words, if your discretionary limit is set at $50,000, you cannot sell goods on credit to a company in excess of that limit, unless you contact your insurer, and they perform a credit check and other necessary due diligence checks, and issue their approval for the transaction.

Understanding Premium Costs

Your premium costs are usually calculated as a percentage of your overall revenue. The most common rate is at 0.1 to 0.3 cents per dollar of revenue. So, if your business did $5 million in sales per year, you could expect to pay around $10,000 in insurance premiums.

This will vary based on if your business has a history of collecting bad debt, the companies with which you’re working, the average value of your transactions, and a number of other factors. Your own export credit insurance premium costs could be higher or lower than this number.

Need More Help Understanding Trade Credit Insurance? Contact Us Today!

If you’d like us to provide you with a sample insurance policy and walk you through the coverage you can expect in more detail, contact the team at Niche TC right away.

We can help clear up any questions you have about our trade credit insurance services – and our insurance brokers can help you find the right policy, tailor-made to your particular needs. Get started today, and protect 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 Experts Think

Credit Insurance Vs. Debt Protection: What’s The Difference?

If you have one or more credit cards or installment loans, or you are planning on taking out a new loan like a mortgage or car loan, you may want to consider investing in either credit insurance or debt protection.

While these financial products may seem similar, they actually have some significant differences, which can make one or the other a better choice in your own particular situation. Curious to learn more? In this article, we’ll discuss everything you need to know about the differences between credit insurance and debt protection.

NOTE: This information is purely informative, and not intended to be financial advice. Consider your own particular situation and financial means before taking out any kind of loan or insurance policy.

Credit Insurance – Covering Your Loans In Unexpected Situations

Consumer credit insurance is typically offered by life insurance companies. However, in some cases, it can be offered directly by a credit card company or another loan company. It comes in three common forms, each of which is distinct and has a different purpose;

  • Credit life insurance – This type of credit insurance covers the repayment of your outstanding debt, should you die unexpectedly. If you die, the debt will be cancelled altogether, and neither you nor any family members will be responsible for any additional payments on the debt. You will usually need to prove the death of the policyholder by providing a death certificate and other official documentation.
  • Credit disability insurance – This type of insurance helps cover the cost of your loan if you become disabled and cannot work. Usually, there is a waiting period of between 14-30 days before this insurance kicks in – during this time, you’re still responsible for making payments. In some cases, though, the benefit will be retroactive, so you may be compensated for these payments, if you’re still disabled after the waiting period has ended.In most cases, the money you will receive will be equal to the loan’s minimum monthly payment. However, this benefit will not be paid to you. Rather, it is paid directly to the lender – this means you can’t actually access this cash. It’s paid on your behalf to the holder of the debt, preventing you from defaulting.
  • Credit unemployment insurance –Similar to credit disability insurance, this type of insurance covers the minimum monthly payments on your debt, should you become involuntarily unemployed, and have difficulty finding new work in a timely manner. In most cases, you’ll have a 30 day waiting period before benefits begin to kick in. Again, some policies are retroactive, so after the waiting period, you may be compensated for the previous month’s payment.

This type of insurance is most commonly offered as a part of a mortgage, credit card, or a personal loan – and provided at the time that the credit contract is approved. However, some lenders do allow this type of insurance to be offered later.

It’s important to note that, in many cases, credit insurance policies have a maximum number of payment instalments – after which coverage ceases. There may also be a lifetime payment limit. If you hit this limit, no more payments will be made on your behalf. In addition, credit insurance may not cover the entire amount of a debt.

Consider a credit card, for example. If you become disabled, your credit insurance will make minimum payments on your debt – and it will continue to collect interest and grow, as long as minimum payments are being made.

Make sure you read the fine print when signing up for credit insurance, to make sure that the policy makes sense for your situation, and is a good financial choice.

Debt Protection – It’s Not Insurance, But It’s Similar

Debt protection is usually priced differently than credit protection, and it’s only issued by the holder of a loan. It’s a common feature on many major credit cards – other terms used to refer to debt protection include “payment protection” or “debt cancelation.”

If you opt for debt protection on a credit card, you’ll be charged a monthly fee, based on a percentage of your balance at the end of the month.

Like credit insurance, your minimum payments will be covered if you have a qualifying event – often job loss or medical disability. In some cases, the balance may be completely eliminated under specific circumstances, such as the death of the debtor.

It’s important to note that there are often more exclusions and other issues with eligibility, which are not always disclosed when you sign up for debt protection. Seasonal or part-time work, self-employment, are often excluded from job-loss benefits.

It may also be difficult to have your claim processed and approved. Debt protection is not an insurance product, so the companies who issue this benefit have much more flexibility and leeway when designing their programs, which can result in difficulties in claim processing.

If you do sign up for a debt protection program, it is very important to read through the terms and conditions before you sign up. You will want to understand exactly what benefits you’ll receive, the conditions and terms of the agreement, and any exclusions that may face you. You should also check the price to make sure that it’s reasonable – in many cases, the cost of debt protection may be much higher, compared to credit insurance.

Make The Right Choice For Your Financial Future – And Stay Covered!

At Niche TC, we’re experts when it comes to credit insurance services. So we encourage you to explore your options for insurance and debt protection – as well as other insurance instruments like life insurance – to make sure that your financial future is protected, and you’re covered in case of unexpected life events such as sudden death, disability and sickness, and loss of work.

*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.