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Trade credit insurance

Trade credit insurance - a risk management too?

Trade Credit Insurance is also known as Credit insurance. It is considered as a risk management tool that covers the payment risk which may arise from the delivery of goods. As per this policy credit insurer usually pays as per an agreed percentage of invoice or account receivable that is unpaid.

Trade credit insurance helps to protect manufacturers, traders as well as service providers against the losses of non-payment in commercial trade debt. If a buyer does not pay (due to certain reasons such as bankruptcy or insolvency) or pays late after the due date, the trade credit insurance policy will have to pay a specific percentage from the outstanding debt.

Trade credit insurance results in preventing bankruptcies along with this help companies to manage credit, and even introduce them with opportunities for business expansion in the global marketplace.

Key features of trade credit insurance

  • Protects the company and balance sheet from bad debt.
  • Potentially help to reduce and quantify bad debt provisions.
  • Provide better borrowing as well as financing options.
  • Increase profitability.
  • Results in growing sales .
  • Prevent losses even before they actually occur.
  • Maintain cash flow within the business, help to maintain and protect budgets and business plans.
  • Information, screening of customers to decide dealing with which will be more accurate.
  • Improves credit decisions.
  • Protects business investors and stakeholders from huge loss.

When should companies purchase trade credit insurance?

Firms should turn to trade credit insurance when they are having a credit problem or there could be foresee exposure in the near future. But it can often be too late for insurers to take on and cover the risk. Trade credit insurance may help companies for applying longer term risk management strategies so firms are advised to consider trade credit insurance when business is stable and in good. Such that if a problem strikes, there would be no need to engage them trying coverage for an uninsurable risk.

What risks does trade credit insurance cover?

The primary function of trade credit insurance is protecting sellers against buyers that do not pay for the delivery due to some unforeseen circumstances. It insures seller against a buyer that has declared in certain condition such as bankruptcy, insolvency or a similar legal status, as well as this policy protect insured’s against buyers who delay payments under such legal status.

As per the International Credit Insurance & Surety Association “If a buyer does not pay to the seller for the service being availed, the trade credit insurance policy will have to pay out a percentage of the outstanding debt. This percentage can usually range from 75% to 95% of the invoice amount, but might be higher or lower and that depends on the type of cover that was purchased.

How Trade Credit Insurance Functions?

  • 01
    The credit insurance seeker checks out the Trade Credit Insurance quotes from different websites of the insurance companies for comparison.
  • 02
    After choosing one of the policies, the required documents have to be submitted to the insurance company by the seeker.
  • 03
    The premium is calculated as per the chosen one and the policy commences with the payment of the 1st premium.
  • 04
    When there is any loss of debt or delay in payment, the claimant is supposed to intimate the insurance company for this.
  • 05
    After receiving the required claim documents by the insured, an investigator further verifies the risk and accordingly pays the compensation amount to the claimant.
  • 06
    If the claim is found not liable for compensation, it will be rejected and same will be communicated to the claimant.

Advantages of buying a trade credit insurance

  • check_circle_outlineProtects the business profit and loss along with the balance sheet against bad debt
  • check_circle_outlineInsured gets better borrowing and financing options which further increase profitability
  • check_circle_outlinePrevents losses before they occur and cover the risk of non payment and payment delay
  • check_circle_outlineMaintains cash flow which results in protected budget and business plan
  • check_circle_outlineProtects business investors and stakeholders

Want more information about trade credit insurance? Talk to our finance experts now.

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