Approximately 82% of bankruptcies are triggered by cash flow problems caused by issues like customer non-payment. Trade Credit Insurance protects B2B companies or sellers of goods and services against bad debt, including insolvency, slow payment, and political risks.
What Is Trade Credit Insurance (TCI)?
Many commercial buyers request a credit to make large purchases of goods or services, but lending to those customers puts a supplier at risk that it won’t be repaid. TCI mitigates that risk by compensating policyholders for the unpaid debt up to the applicable coverage limits.
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Trade credit insurance (TCI) is a method for protecting a business against its commercial customers’ inability to pay for products or services, whether because of bankruptcy, insolvency, or political upheaval in countries where the trade partner operates.
TCI sometimes referred to as accounts receivable insurance, debtor insurance, or export credit insurance, helps businesses protect their capital and stabilize cash flows.
When should you consider Trade Credit Insurance?
If you sell goods and services on credit terms rather than requiring payment upfront are exposed to the risk of nonpayment and should consider this coverage. In addition, if your company works with international exports, you have an increased risk and should also take this insurance into account.
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How can Trade Credit Insurance benefit your business?
Protecting your accounts receivable from potential bankruptcy is only part of the benefit this type of debtor insurance can provide. In addition to protecting your business from the risk of insolvency, it can help:
- Enhance trade, providing you with the confidence to develop and expand your market
- Guarantee cash flow enabling you to build strong relationships with your suppliers and employees
- Safeguard customer relationships through improved communication and enhanced credit terms
- Improve your access to finance and your relationship with your bank
- Meet the risk management requirements of your stakeholders or board and provide peace of mind
- Secure better borrowing terms with a lender
What Does Trade Credit Insurance Cover?
Trade 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 other issues, or if payment is very late, a trade 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.
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With trade credit insurance, you can reliably manage the commercial and political risks of trade that are beyond your control. In addition, trade 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.
There are four types of trade credit insurance, as described below. The cost of your policy will vary depending on the type of coverage you choose, your industry, your annual revenue that needs to be insured, your history of bad debts, your current internal credit procedures, and your customers’ creditworthiness, among other factors.
Whole Turnover – This type of trade credit insurance protects against the non-payment of commercial debt from all customers. You can choose if this coverage applies to all domestic sales, international sales, or both.
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Key Accounts – With this type of insurance, you choose to insure your largest customers whose non-payment would pose the greatest risk to your business.
Single Buyer – 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.
Transactional – This form of trade credit insurance protects against non-payment on a transaction-by-transaction basis and is best for companies with few sales or only one customer.
What is Not Covered by Trade Credit Insurance?
Trade 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 business).
How Does Trade Credit Insurance Work?
Strong trade 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 greatly reduced. Your bankers or shareholders can be reassured about the financial stability of your company.
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Final thoughts & FAQs
Trading with other businesses using extended payment terms presents a huge risk for any company. Just one large customer not paying up can devastate your balance sheet, drain your working capital or even threaten your company’s survival. Even financially sound, creditworthy customers, pose a significant risk, which is why many companies don’t have the confidence to take new opportunities for business growth.
That’s why trade credit insurance can be a solution with multiple benefits, not only securing your working capital but giving businesses the financial reassurance and expert advice they need to grow their operations and expand into other markets. Trade credit insurance is a consideration for any company with commercial clients at home or abroad.