If you own a business, you know that there is always a risk of not receiving payment for the goods and services you provide on trade credit.
Certain factors may hinder your customers ability to pay your bills, or their business may become insolvent, leaving you out of pocket and feeling the impact of negative flow on effects for your own business. If your company exports goods and services, or conducts any business overseas, unpaid debts may also arise due to political risk events.
What is Trade Credit Insurance?
Trade Credit Insurance (also known as Debtor Insurance or Accounts Receivable Insurance) can protect your business against unpaid commercial debts caused by financial or political reasons that result in your customers not being able to pay their bills.
This policy is designed to protect companies that sell goods or services on credit terms and you can structure the policy to insure either all your debtors, or just a few key accounts. The level and cost of your Trade Credit cover will differ between businesses as there is no one size fits all approach. Factors including the size of your portfolio, the level of risk of your customers pose and the market you operate in will be taken into consideration by the insurer.
Most Trade Credit policies will provide your business with access to a Trade Credit System, which is a platform that enables a user to access a network of real-time information, analysis and business assessments to better understand your industry and your suppliers. This will differ between each insurer and which level of cover you opt to take. The insurer(s) will run credit reports on your debtors and apply risk ratings to each one. This information can also be used to assist you in making business decisions such as extending credit terms for businesses with a high rating and avoiding using customers with unfavourable results.
In the event that you have an unpaid invoice, your insurer may try to recover the debt first, through negotiations or debt collection services with either the customer or receiver/liquidator, depending on the situation. If the debt cannot be recovered, the insurer will offer a settlement based on the specific terms and conditions of your policy.
Benefits of Trade Credit Insurance:
- Helps to protect your cash flow against the risk of a customer defaulting on sales made on credit terms
- Helps mitigate your business’ risk when a large portion of your income is made up by a small number of key accounts
- Provides an insured credit limit for a customer and monitors their portfolio performance during the elected policy period
- May allow for a reduction in your company’s bad debt reserves
- Help safeguard your customer relationships
- May enhance your ability to trade by expanding your market
- Can make your business more attractive to financers
For more information on how a Trade Credit Insurance Policy can help protect your business, contact us to speak to an Adviser today.