Benefits of Trade Credit Insurance Coverage
Companies invest in trade credit insurance for a variety of reasons, including:
- Sales expansion – If receivables are insured, a company can safely sell more to existing customers, or go after new customers that may have been perceived as too risky.
- Expansion into new international markets – Protection against unique export risks and market knowledge to make accurate growth decisions.
- Better financing terms – Banks will typically lend more capital against insured receivables and may also reduce the cost of funds.
- Reduction in bad-debt reserves – Insuring receivables frees up capital for the company. Also, credit insurance premiums are tax deductible, but bad debt reserves are not.
- Actionable economic knowledge – The trade credit insurer’s information database and technology platform help reduce operational and informational cost.
- Protection against non-payment and catastrophic loss – Should an unforeseeable event catch a company and its insurance carrier without warning, the bill gets paid via the claims process.
- Increase in sales and profits – A credit insurance policy can typically offset its own cost many times over, even if the policyholder never makes a claim, by increasing a company’s sales and profits without additional risk.
- Improved lender relationship – Trade credit insurance can improve a company’s relationship with their lender. In many cases the bank actually requires trade credit insurance to qualify for an asset-based loan.
How Does Trade Credit Insurance Work?
Trade Credit Insurance Policy Onset
At the onset of the credit insurance policy, the carrier will analyze the creditworthiness and financial stability of the policyholder’s insurable customers and assign them a specific credit limit, which is the amount they will indemnify if that insured customer fails to pay.
Unlike other types of business insurance, once a company purchases trade credit insurance coverage, the policy does not get filed away until next year’s renewal − the relationship becomes dynamic.
Trade Credit Insurance Policy Coverage
A trade credit insurance policy is constantly updated and cross referenced over the course of the policy period.
It is the credit insurer’s responsibility to proactively monitor its customers’ buyers throughout the year to ensure their continued creditworthiness. They do this by gathering information about buyers from a variety of sources, including:
- Visits to the buyer
- Public records
- Information supplied by other policyholders that sell to the same buyer
- Receipt of financial statements
Throughout the life of the policy, the policyholder may request additional coverage on a specific buyer should that need arise. The insurer will investigate the risk of increasing the coverage and will either approve the additional coverage, or maintain with a detailed explanation. Similarly, policyholders may request coverage on a new buyer with which they’d like to do business.
Trade Credit Insurance Policy Claims
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 should occur, policyholders would file a claim with supporting documentation, and the insurer would pay the policyholder the claim benefit, typically within 60 days from the date of loss on domestic claims.