Business Credit Insurance, With customers holding the potential to both make and break a business, financial protection is top of the agenda for most business owners, which is precisely the role of business credit insurance.
Because unpaid invoices may make up close to half a company’s assets, they can significantly reduce its cash flow and investment capacity. Therefore, business credit insurance protects businesses like yours against losses from non-payment of a business trade debt. Thus safeguarding your cash flow against debtor insolvency or protracted default.
Suppose an invoice becomes aged or a customer enters insolvency proceedings. In that case, the credit insurance company will ensure that you get paid for any goods or services you have supplied, subject to a designated credit limit.
Benefits of Business Credit Insurance Coverage
- While business credit is a powerful commercial tool for conquering new markets and building customer loyalty, it is also a double-edged sword that can weigh on your working capital and cash flow. As part of your cash flow management strategy, trade credit insurance can help you control this credit risk. it Safeguards your cash flow in the event a debtor falls insolvent or takes longer than the agreed credit period to pay an invoice
- Inadequate debt protection can be provided against your entire debtor book, key customers, or just single debtors that may have an adverse credit history.
- Allows you to substantially improve your DSO (Day Sales Outstanding), which is the average number of days it takes to recover payment after a sale is made.
- Guarantees your ability to manage your operations and investments efficiently in the short and medium-term and secure your growth.
- Offers peace of mind to your financial partners, reassuring your bankers or shareholders about the financial stability of your company and giving them a greater inclination to guarantee your financing.
- Protects and accelerates your commercial development while controlling the risks that business credit poses to your cash flow, giving you the advantage of an efficient and resilient business credit strategy.
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What Does business Credit Insurance Cover?
Business credit insurance protects businesses from non-payment of commercial debt. It covers your business-to-business accounts receivable. If you do not receive what you are owed due to a buyer’s bankruptcy, insolvency, or another issue, or if payment is very late, a business credit insurance policy will pay out a percentage of the outstanding debt. This helps you protect your capital, maintain your cash flow, and secure your earnings while extending your competitive credit terms and helping you access more attractive financing.
With business credit insurance, you can reliably manage the commercial and political risks of business that are beyond your control. In addition, business credit insurance can help you feel secure in extending more credit to current customers or pursuing new, larger customers that would have otherwise seemed too risky.
Types of credit insurance
There are several key options to choose from depending on the risk you might be exposed to, which are detailed here:
Whole turnover credit insurance
This is the most common type of credit insurance policy. It covers all (or most) of a business through a comprehensive approach based on its turnover – protecting a business from non-payment from all current and future customers over a typical 12 month period. In addition, it allows a company to offer its customers credit up to a fixed limit, with an overall premium priced on its annual turnover.
Provides the maximum level of credit protection as the facility covers your entire debtor book. Businesses can choose a fixed policy with a set premium price, or they can declare their turnover both at the start of the procedure and at its end to receive a rebate if their turnover was less than initially forecast.
You can choose if this coverage applies to all domestic sales, international sales, or both.
Key account policy (critical customer cover)
With this type of insurance, you choose to insure your largest customers, individual customers with an adverse credit history, or invoices that are highly valued whose non-payment would pose the most significant risk to your business.
As a rule, this type of cover allows you to name up to 10 key customers. After that, you can select the limit level, but you remain entirely responsible for all customers not named on the policy.
Single risk cover
Also known as specific risk insurance or a single buyer policy, this type of cover protects a business from non-payment from a single customer or contract. For example, if most of your transactions are with one customer, you can choose a trade credit insurance policy that ensures against potential default from just that customer.
The premium price is based on the size of the customer’s turnover or the contract value, and it’s often taken out by companies that rely on a significant buyer for most of their sales. Funders or investors who want the business to buy protection against a primary customer can request this type of credit insurance. Often this is seen in public companies, but it can cover any company with a good quality of credit.
Protects against the credit risks associated with trading abroad, it safeguards a business from their overseas customers failing to pay and can sometimes include political risk insurance.
Businesses can take out a policy that purely covers their exports or domestic trade, but most policies will accommodate both. As such, international business credit insurance is often integrated into a standard approach for businesses that trade internationally. It can offer a breadth of protections and classic cover for insolvency and defaulting customers. For example, companies can cover for anything from political risk to currency shortages to social and economic instability to government intervention.
What is Not Covered by business Credit Insurance?
Business credit insurance only covers business-to-business accounts receivable from commercial and political risks. Outstanding debts are not covered unless there is direct trade between your business and a customer (another company).
How does business Credit Insurance Work?
Substantial business credit insurance remains the most reliable way to deal with trade credit risk and avoid cash flow issues. It protects and accelerates your commercial development while controlling trade credit risks to your cash flow.
With trade credit insurance, you ensure that you are compensated quickly in the event of bad debt, so your working capital ratio improves, uncertainty regarding your cash inflows is significantly reduced. Your bankers or shareholders can be reassured about the financial stability of your company.
Business Credit Insurance Policy Claims Process
When signs indicate a company is experiencing financial difficulty, the insurer notifies all policyholders that sell to that buyer of the increased risk and establishes an action plan to mitigate and avoid loss.
If an unforeseeable loss occurred, policyholders would file a claim with supporting documentation. Then, the insurer would pay the policyholder the claim benefit, typically within 60 days from the date of loss on domestic claims.
How much does business credit insurance cost?
How much your premiums cost depends on several factors. First of all, it commonly depends on the nature of the cover you need – that’s to say, whether you’re looking to insure your entire sales ledger or a select few clients.
Secondly, the higher the limit of indemnity you require, the more you will typically have to pay for your premiums. Thirdly, insurers consider the credit rating and history of your existing and potential clients to work out their potential risk, which may include factors such as the industry in which you operate.
Your premium will either be fixed or rated. A fixed premium is set for the policy duration, and companies can pay the tip in a series of monthly installments or one lump sum. A-rated compensation, however, works by applying a percentage rate to the total amount of revenue you are insuring or the estimated insurable turnover for the policy period. This gives an estimated premium amount, which is typically paid by deposit through the policy.
Then, you would have to supply a declaration of turnover to your insurer at the end of the policy, which provides the actual insurable turnover. Then, the premium rate is applied, and the substantial premium amount is calculated. If the company has overpaid, the insurer will refund the difference. However, if the actual premium amount is more than the estimation, the customer must pay the excess to the insurer.
Key business credit companies you can work with
Brokers have the right relationships with a range of insurers that enable them to get the most suitable cover for each client. The following companies are some of the critical providers you can work with:
Euler Hermes is one of the world’s leading business credit insurers with a history spanning over a century and offices operating in over 50 countries. Its global reach is down to crucial acquisitions of specialist business credit companies, such as Trade Indemnity in the UK. Today, it’s well known as an international expert in surety, debt collection, fraud insurance, and structured trade credit, and political risk.
Coface is driven by their belief in business as a force for good in the world. They have an international network dedicated to credit insurance and risk management, and they help customers with credit decisions to strengthen their ability to sell domestically and overseas.
A nexus is a London-based group founded in 2008, which has since grown into an international independent specialty managing general agent (MGA). Represented in nine key countries, Nexus offers perceptive business credit policies and guidance among their specialties.
AIG is a global insurance company that offers a range of products; AIG is one of the largest companies specializing in the UK business insurance market – covering thousands of mid-sized and smaller companies and many public sector organizations.
QBE – headquartered in Sydney, QBE is a general insurance and reinsurance company with offices in 27 countries and a focus on commercial specialty products and risk management solutions.
Chubb is the world’s largest publicly traded property and casualty insurance company, which we occasionally work with for specialist cases.
The Goal of Business Credit Insurance
Ultimately, should an unexpected loss occur, the trade credit insurance policy provides indemnification, thus protecting the policyholder’s revenue and bottom line? In addition, by maintaining a solid relationship between the insurer and the credit management department, trade credit insurance may be the wisest investment a company can make to protect its profits, cash flow, and capital.
The ultimate goal of credit insurance is not simply to indemnify losses incurred from default but also to provide businesses with the support and knowledge they need to avoid foreseeable losses from the start.