Credit insurance is a safety net that protects businesses against the risk of customer defaults due to bankruptcy, insolvency, and protracted payments. It guarantees efficient transfer of risk to a trade credit insurer, indemnifies bad debts, and improves the company’s internal processes.
Risk transfer also means that you, the policyholder, are protected if customers fail to pay their credit debts. In addition, the insurer can help mitigate the risk of financial loss or damages through credit management support.
Types of Risks Covered By Trade Credit Insurance
Trade credit insurance will generally cover two types of risks:
- Commercial risks – This is the risk that your existing customers will not be able to pay the outstanding balances because of insolvency, bankruptcy, or other financial reasons.
- Political risks – This is non-payment by the buyer due to events beyond the customer’s or company’s control. These risks are caused by political events, such as civil wars, natural disasters like earthquakes, and economic troubles, such as shortage of currency. A credit insurance policy can also cover cancellation of import license, revolution, and non-payment by government buyers.
How Does Credit Insurance Work?
When it comes to international trade, customers can make or break a company, so credit insurance plays a critical role in financial protection. The worst nightmare in the working of a business is the financial loss that can occur due to different reasons. Sometimes you can extend credit to a buyer or a group of buyers who then fail to pay for the product or service.
If the amount turns out to be significant, it could lead to compromised operations or even shutting down the company. Credit insurance helps protect your business from such situations by paying the money owed by the buyer.
What are The Types of Credit Insurance?
- Single risk cover – Single risk cover or specific risk insurance is a type of credit insurance that protects your business from a single risk or contract.
- Export risk cover – This insurance policy is designed for exporting companies and protects businesses from their foreign clients failing to pay. It provides coverage for various risks, including the inconvertibility of exchange, war, new import restrictions, and other risks that may arise due to the actions of the customer or third-party government.
- Whole turnover risk cover – This type of credit insurance policy covers almost every aspect of a business with a comprehensive policy according to its turnover. It allows a business to extend credit to customers up to a certain limit.
- Major buyer policy – This policy allows you to protect your business from a listed customer failing to pay. A thumb rule is that you can list up to ten customers who are likely to default on their payments.
Learn More about Trade Credit Insurance Coverage with Niche Trade Credit
Niche Trade Credit has been providing credit insurance coverage to small and large businesses for over 30 years. As a trusted credit insurance brokerage in Australia, we are committed to giving your business the confidence it needs to navigate international markets. Contact us at 02 9416 0670 to schedule a consultation to get started.
*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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