What Is Trade Credit Insurance?
One of the most challenging issues that businesses face
, regardless of their size, is ensuring payment for their goods and services. Despite this, many are unaware of trade credit insurance and how it can assist businesses by minimising exposure and risk.Credit insurance protects the money due for goods and services that have already been supplied to a customer. As highlighted in the recent recession, declining sales and unforeseen circumstances can mean that even good customers with the best of intentions can struggle to meet their previously agreed payment terms. As a result, customers cashflow problems are passed on to their creditors, which in turn means that they may also struggle to meet their payment commitments.
Trade credit insurance acts as a cushion against the impact of defaulting customers and the bad debts that would otherwise arise when a customer is unable to meet their payment terms (or in situations where the customer goes bankrupt). Effectively any payment risk is passed on to the insurer. This means that with a trade credit insurance policy in place, a large percentage (often up to 90%) of the outstanding debt will be covered.
Credit insurance providers can also help businesses plan ahead by alerting their clients to potential risks, should a particular company become uninsurable. In some cases cover may be withdrawn but the insurer will honour the cover provided up until a given date when the insurance was withdrawn. This helps prevent a domino effect of bad debt where one company cannot pay its debts which then has a knock on effect to their suppliers, and their suppliers in turn.
Credit insurance providers can also assist businesses in decisions about who to trade with, therefore helping them to trade more securely and reducing potential trading risks.
Furthermore, businesses that have a clearly defined credit insurance policy in place are often able to benefit from more favourable finance terms and funding requests from banks.
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