Trade credit insurance (TCI) can be of help for your company when your clients can’t pay for what they’ve bought from you. It goes by a few different names like debtor insurance, export credit insurance, or accounts receivable insurance.
Basically, it helps protect your company’s money and keeps your cash flow steady by covering you if your clients can’t pay you back for the goods or services you’ve provided. It’s like having a backup plan to make sure your company doesn’t lose out if customers can’t pay their bills.
What is Trade Credit Insurance
Credit insurance (TCI) is a form of insurance that shields businesses from customers who can’t pay for goods or services. This insurance can also be called accounts receivable insurance, debtor insurance, or export credit insurance.
How Trade Credit Insurance Works
Just like insurance plans, the price depends on how much risk the policyholder might bring to the insurer. Insurers assess a company’s risk by considering factors such as how much business it does, how reliable its customers are with payments, what industry it’s in, and the agreed-upon repayment schedules.
Generally, the coverage costs less than 1% of the total sales volume insured, as stated by Meridian Finance Group, a company specializing in insurance brokerage. Companies can adjust their insurance to match their budget and risk level.
For instance, they might choose to insure a specific customer, particularly if it’s a big or high-risk one, or a few customers. Some plans also offer extra coverage that comes into play if the main insurance doesn’t cover the entire claim.
What Does Trade Credit Insurance Cover
- Commercial Risk: TCI covers the risk of non-payment by a buyer due to financial reasons such as bankruptcy, insolvency, or protracted default.
- Political Risk: TCI covers non-payment due to external events beyond the control of both parties, such as geopolitical disturbances, war, terrorist attacks, riots, or natural disasters.
- Key Buyers Policy: Businesses can insure only their key accounts or important customers with this policy.
- Single Buyer Policy: This policy provides insurance coverage for accounts receivables related to only one buyer.
- Whole Turnover Policy: This policy allows businesses to cover their entire portfolio of buyers.
- Credit Limits: Insurers assign a specific credit limit to each buyer, which is the amount they will indemnify if the buyer fails to pay.
- Premium: The cost of TCI is usually charged monthly and is calculated as a percentage of sales for that month or as a percentage of all outstanding receivables.
What Trade Credit Insurance Doesn’t Cover
Trade credit insurance (TCI) excludes the following:
- Non-credit risks: TCI doesn’t protect against physical damage, loss of goods, freight, or other non-credit-related risks.
- Disputes: TCI doesn’t cover disagreements between buyers and sellers regarding the quality, quantity, or delivery of goods or services.
- Contractual obligations: TCI doesn’t cover a buyer’s failure to meet contractual obligations, like refusing delivery of goods.
- Voluntary settlements: TCI doesn’t cover settlements made by the seller without the insurer’s approval.
- Currency fluctuations: TCI doesn’t cover losses due to changes in currency exchange rates.
- Interest and financing charges: TCI doesn’t cover interest or financing costs for overdue accounts.
- Self-insured deductibles: TCI doesn’t cover the deductible amount paid by the policyholder before the insurer pays out.
- Pre-existing conditions: TCI doesn’t cover situations like a buyer’s insolvency or bankruptcy before the policy takes effect.
- Non-compliance with policy terms: TCI doesn’t cover claims arising from the policyholder’s failure to follow the terms and conditions.
It’s crucial to thoroughly examine the policy’s terms and conditions to grasp what’s included and what’s excluded, ensuring sufficient protection for your business.
How Much Does Trade Credit Insurance Cost
The annual fees for your business insurance usually range from a fraction of a cent to a quarter of a cent. This means you should expect to pay between $2,000 and $5,000 at the end of the year if your sales reach $2 million. Moreover, various factors influence the cost of your coverage, including:
- The type of policy (covering individual buyers, important accounts, or overall sales).
- The level of risk covered for each transaction.
- Your business history, including any previous bad debts.
- The financial reliability of your customers.
- Payment terms with your customers.
- The industry you operate in.
- The country where your customers are based.
As customer purchases increase, businesses may buy more from suppliers and negotiate lower prices.
Major Benefits of Trade Credit Insurance
Trade credit insurance usually lowers the chance of companies not paying back what they owe, making them more willing to lend money.
Besides, having a plan to minimize losses might be required in industries where most big competitors already use TCI to stay competitive. Also, giving customers higher credit limits helps businesses grow bigger and more efficient.
Companies That Offer This Insurance
Here are some companies that offer this Insurance:
- AIG
- Zurich Insurance Group
- Chubb
- Coface
- Allianz Trade
- Atradius
- FCIA
- XL Catlin
- QBE
- Euler Hermes
- AXA
These Insurance companies’ options are only a few, but there are many other companies that offer Trade Credit coverage. It’s really important to carefully look into and compare different policies. Then, find the one that fits your needs the best.