Trade credit insurance is a form of insurance that protects businesses from losses due to non-payment by their customers. It is an essential tool for companies that extend credit to their customers, providing them with financial security in case of default or bankruptcy. This article will discuss how trade credit insurance works and the key features that businesses should be aware of.
The Basics of Trade Credit Insurance
Trade credit insurance is a policy that covers a business’s accounts receivable, which is the money owed to them by their customers. When a customer defaults or files for bankruptcy, the insurance company pays the outstanding amount to the business up to the policy limit. The policy limit is the maximum amount the insurance company is willing to cover for non-payment.
To obtain trade credit insurance, businesses must apply to an insurance provider. The insurance provider will then conduct a credit assessment of the business’s customers to determine their creditworthiness and risk of default. Based on this assessment, the insurance provider will offer a policy with a set limit and premium, which is the insurance cost.
Key Features of Trade Credit Insurance
The policy limit is the maximum amount that the insurance provider will cover for non-payment. This limit is typically a percentage of the business’s total accounts receivable. The higher the policy limit, the more coverage the business will have against non-payment. However, higher policy limits also come with higher premiums.
Premiums are the cost of the insurance policy and are typically based on the business’s level of risk and the policy limit. The insurance provider will consider various factors when calculating premiums, including the business’s creditworthiness, the creditworthiness of its customers, and the industry it operates in. Lower-risk businesses will typically have lower premiums than high-risk businesses.
A deductible is an amount the business must pay out of pocket before the insurance provider pays for any non-payment. Deductibles are typically set as a percentage of the policy limit, and higher deductibles can lead to lower premiums. However, businesses should be careful when setting deductibles, as they can also increase the financial burden in case of non-payment.
Types of Coverage
Two types of trade credit insurance coverage are whole turnover coverage and single debtor coverage. Whole turnover coverage is a policy that covers all of a business’s customers, while single debtor coverage covers only one specific customer.
Whole turnover coverage provides broad coverage against non-payment, covering all of the business’s customers. However, it can be more expensive than single debtor coverage, as it provides a higher level of protection. Single debtor coverage is typically used when a business has one major customer it wants to protect against non-payment.
If a customer defaults or files for bankruptcy, the business must file a claim with the insurance provider. The claims process can be time-consuming and requires the business to provide evidence of the non-payment, such as invoices, contracts, and communication with the customer. Once the claim is approved, the insurance provider will pay the outstanding amount up to the policy limit.
Niche trade credit insurance brokers specialize in providing trade credit insurance policies for specific industries or sectors. These brokers have in-depth knowledge and expertise in the specific risks and challenges that businesses in those industries face. They can provide tailored policies that meet the unique needs of their clients, which can lead to better coverage and more competitive premiums.