Trade Credit Insurance also know as Accounts receivable insurance, trade credit insurance, credit risk insurance, business credit insurance, export credit insurance, trade risk insurance, and business risk insurance.
Why do you need Trade Credit Insurance?
Businesses want to purchase goods and services on credit in order to improve their cash flow. In business, the principle of cash flow is vitally important. The ability to obtain goods or services now and pay for them at a later time helps businesses operate. Not only does it allow a business to use its existing cash resources for a longer period, but it also gives the business a chance to add its value to those goods or services and resell them at a profit before it has to pay for them. In effect, the business may be able to make money before it has to spend money. That ability helps businesses prosper and allows the entire economy to grow, to the benefit of all.
Of course, extending credit to customers also involves some risk. What if the customer does not pay at the time it is expected? Slow payment is detrimental to a supplier’s cash flow, and that restrains the growth of a business. Or what if the customer does not pay at all? In that case, the supplier suffers a loss, and losses have a negative effect on revenues and profits as well as cash flow. Too many losses can cause a business severe harm and even lead it to fail entirely.
It can include coverage for these general circumstances
- Financial inability to pay, for example, due to bankruptcy or some other type of insolvency (such as becoming subject to liquidation or receivership, etc.); this is often referred to casually as “can’t pay.”
- Protracted default, which means the customer has not paid a valid invoice that is far past due although there is no formal evidence of financial inability to pay; this is often referred to casually as “won’t pay.”
With credit insurance, you can take on greater risk more safely. When you know you are protected against the chance that a big customer may not pay, you can welcome the orders that will make your biggest customer an even bigger customer. You willingness to extend higher limits of credit makes a customers easier to to work with, and it can help you attract additional business.
Credit insurance can allows you to extend more favorable credit terms to your customers, and that helps your businesses increase sales.
Accounts Receivable Insurance and Trade Credit Insurance benefits can include the following:
- Mitigation of customer nonpayment risk
- Extension of more favorable credit terms to customers
- Extension of credit to new customers
- Obtaining better financing terms from lenders
- Expansion into former markets
- Reduction of the needed amount of bad debt reserves
Why Buy It?
Virtually every commercial business experiences a given amount of customer nonpayment—every year, some amount of sales will go unpaid for. Usually, those losses fall within a certain range. Some years, the business will experience losses at the high end of the range, and some years the business will experience losses at the bottom of the range. Businesses know that these losses will occur, and they generally account for these losses in their business plans.
Since these types of losses are to be expected, they are not the types of losses that credit insurance is designed to cover. As insurance agents already know, expected losses are not the type for which insurance coverage can be obtained.
It is the unexpected loss—the loss that has not been planned for—that can legitimately hurt a business. Unexpected losses are by definition larger than the typical losses the business generally experiences. And they come from out of the blue—from a long-standing customer who has always paid its bills on time or from a new customer with a good reputation and an impeccable payment record with its other suppliers.
Trade credit insurance protects businesses from financial losses due to non-payment or default by their customers. By covering the cost of bad debts, trade credit insurance helps mitigate risks associated with extending credit to customers.
As a business, securing trade credit insurance protects your financial interests when extending credit to customers.
What Trade Credit Insurance Covers:
- Non-payment or default by customers.
- Bad debts.
- Reimbursement for losses and additional costs.
The Importance of Trade Credit Insurance:
- Mitigates risks associated with extending credit to customers.
- Provides financial protection for bad debts.
- Offers peace of mind for the business.
- Allow the company to take on more customers and increase sales.
Why You Need Trade Credit Insurance:
- Customers may default on payments or go bankrupt.
- Without insurance, the financial burden falls on the business.
- Coverage ensures reimbursement for losses and additional costs.
How the Cost of Trade Credit is Determined:
- The creditworthiness of the customers.
- The volume and value of the credit extended.
- The industry and country risks.
- The experience of the company in managing credit risks.
Who Should Have Trade Credit Coverage:
- If your business extends credit to customers.
- Do you have a significant portion of revenue coming from credit sales? If so, you need Trade Credit Insurance.
- If you operate in industries with a high risk of non-payment or default.
- Companies that have a high volume of credit sales.
Accounts Receivable Insurance and Trade Credit Insurance is not the same as the Accounts Receivable Coverage that may be on your business insurance policy
This coverage insures against loss of sums owed to the insured by its customers that are uncollectible because of damage by an insured peril to accounts receivable records. This coverage can be written as a stand-alone inland marine policy and is often included as an additional coverage in business property and businessowners policies.
Insurance on Consumer Loans
Consumers who apply for a mortgage or a personal loan may be asked to buy credit insurance. This type of credit insurance applies when the consumer cannot make his or her payments. There are four main types of coverage.
- Credit life insurance pays off all or some of the loan if the borrower dies.
- Credit disability insurance, also known as accident and health insurance, makes payments on the loan if the borrower becomes ill or injured and cannot work.
- Involuntary unemployment insurance, also known as involuntary loss of income, makes loan payments if the borrower loses his or her job through no fault of his or her own, such as a layoff.
- Credit property insurance protects personal property used to secure the loan if it is destroyed by events such as theft, accident, or natural disasters.
Extending credit to customers is generally not a problem for retail businesses—those that sell items directly to individual members of the public. Retail businesses usually get payment for goods or services at the point of sale. Payment may be made in the form of cash, check, or a credit card. But whatever form it takes, the merchant or service provider gets paid when the customer accepts the goods or services that are the subject of the transaction.
But for commercial businesses—that is, businesses that sell to other businesses—payment rarely comes at the point of sale. Commercial businesses generally get paid after goods or services are delivered, and that means they extend credit to their customers during the period in which payment is due.
The general circumstances covered by credit insurance include the following.
Financial inability to pay, for example, due to bankruptcy or some other type of insolvency (such as becoming subject to liquidation or receivership, etc.); this is often referred to casually as “can’t pay.”
Protracted default, which means the customer has not paid a valid invoice that is far past due although there is no formal evidence of financial inability to pay; this is often referred to casually as “won’t pay.”
The following is a partial list of some large and well-known companies that within recent years have left their creditors with billions of dollars’ worth of unpaid bills as the result of insolvency.
Atkins Nutritionals. Baldwin Piano. Bennigan’s. Burlington Industries. Chiquita Brands. Chrysler. Circuit City. Conseco. Continental Airlines. Converse. Delta Air Lines. Dow Corning. Eastern Airlines. Enron. FAO Schwarz. Frontier Airlines. Fruit of the Loom. General Motors. Hollywood Video. Kmart. Lehman Brothers. Loew’s Cineplex Entertainment. Maidenform. Marvel Entertainment. Montgomery Ward. Northwest Airlines. Owens Corning. Pacific Gas and Electric. Pan Am Airlines.
Planet Hollywood. Polaroid. Purina Mills. Regal Cinemas. Resorts International. Schwinn. Sharper Image. Singer. Six Flags. Sizzler. Smith Corona. Sunbeam. Trans World Airlines – TWA. Tribune Group (Los Angeles Times and Chicago Tribune). Trump Resorts. Tyco International. US Airways. Winn-Dixie. Zenith.
In fact, in 2020 there were 10 MAJOR retailers that went bankrupt and left their merchants burned: ‘Death of an entity’: 10 retailers that liquidated this year 1
Contact us if you need a quote onTrade Credit Insurance call 212-360-2334 to discuss your needs with our insurance professionals
1 https://www.retaildive.com/news/death-of-an-entity-10-retailers-that-liquidated-this-year/587775/