What Experts Think

What is Trade Credit Insurance?

When it comes to business, there’s always going to be some risk involved.

Business owners may take steps to mitigate some, but fail to do the same with others.

When not all bases are covered, so to speak, there’s no guarantee that the business will overcome the hazards it may encounter now and then.

For example, a business owner gets too excited about a new client that they forget to take steps to ensure payment for goods they have to ship to said client.

Since most businesses rely on a steady cash flow, the disruption that non-payment from even one customer can have a big impact on their finances. This is where trade credit insurance comes in.

(Now going back to the question)

What is Trade Credit Insurance?

Otherwise known simply as credit insurance, this is an insurance policy as well as a risk management product that private insurance companies as well as government export agencies offer to businesses.

The goal is to protect the company’s accounts receivables from loss stemming from credit risks.

Usually, these risks involve the client’s inability to pay, whether they simply don’t wish to pay yet, or they become insolvent or else bankrupt.

Some policies may even include a form of political risk insurance, to account for difficulties in collecting payment from foreign clients owing to political unrest, currency issues, and other similar problems.

(The next questions is…)

What Businesses Need Credit Insurance?

Long story short, businesses of any size need credit insurance, although not all of them do get it.

That’s because trade credit insurance is one way to manage the risk of bad debts, which any company would be desperate to avoid.

In fact, a study has shown that an average small business owner can carry over US$195000 in bad debt, which – obviously – is bad for any business’s financial health.

That said, how can you tell if your own business needs credit insurance?

There are a few signs to note, such as:

1. Competition. 

– Let’s say you can only afford to offer customers $25000 line of credit on 15-day terms, while one of your competitors can extend $50000 on 15-day terms, you can tell which company will win the business.

Trade credit insurance will let your business extend riskier terms to customers, since you know you have an extra layer of financial protection to keep you from losing out on deals.

2. High customer credit risks.

Unfortunately, insolvency and bankruptcy are very real occurrences, and they can make collecting extremely difficult.

Being unable to collect your accounts receivables on a regular basis will eventually lead to a negative effect on your cash flow.

Besides revisiting your credit terms, credit insurance will help you determine which customers are high credit risks.

3. Quick turnarounds for opportunities.

Businesses presented with sales opportunities need to act quickly, assessing the financial stability of the potential customers as well as their purchasing power before they can extend credit.

When the likelihood that a customer will make a purchase hinges on how much credit they have available, credit insurance can help you take advantage of that opportunity in a timely fashion.

Essentially, any business owner who wants their business to grow will invest in trade credit insurance, since that extra layer of financial protection will help you manage your credit terms, capitalize on opportunities, and improve the overall health of your business’s financial health.

Choosing a Trade Credit Insurance Provider

Purchasing credit insurance is often more easily said than done, because policies can be quite long, and there are many credit insurance providers to begin with.

Overall, there are three principles to consider when buying credit insurance and choosing a provider.

The first is expertise.

You need to choose a provider that understands how your business runs and knows the inherent risks of your type of business.

Second, there’s quick response.

The provider should be able to react quickly enough when your company needs insight into a potential customer or else needs to update a risk mitigation strategy.

They should also help you make quick decisions when it comes to, say, expanding credit limits in comparison with your competitors’.

Finally, you’ll want to work with a firm that is interested in a long-term partnership with your business, rather than a one-off transaction.

Whether it entails really understanding your company or customizing a policy to suit your individual level of risk, the right trade credit insurance provider for you should be a true partner, not just an insurance provider.