Trade credit insurance

Extending credit to your customers can help your business increase sales, build your customer base, and draw new customers. However, it also comes with the risk of non-payment.

Trade credit insurance, also called debtor insurance, protects your business from financial losses when a customer fails to pay an invoice due to:

• Customer insolvency: If a customer goes bankrupt or becomes insolvent, the insurance will cover most of the unpaid receivables.
• Protracted default: Should a client fail to pay within the agreed-upon credit terms, a policy will help cover these overdue payments.
• Political risks: If international trade is delayed or halted, trade credit insurance can help cover losses resulting from political events, such as war, government intervention, or currency restrictions that prevent payment.

This coverage also improves credit management, increases lenders' confidence in securing financing, and fuels long-term company growth.

Depending on your business needs, there are several types of trade credit insurance you might choose, including:

• Whole turnover policy: Covers your company’s complete portfolio of eligible trade receivables under a single policy. Protects most or all of your customer accounts and reduces risk across your full balance sheet.
• Excess of loss policy: Protects against large, high-risk losses that exceed a predefined threshold or deductible rather than small, day-to-day defaults.
• Single buyer policy: Exclusively covers trade receivables from one specific customer, which can be ideal if a business earns most of its revenue from a single account.

While some insurance companies use the terms interchangeably, accounts receivable coverage and trade credit insurance are two different insurance products.

Trade credit insurance is a standalone policy that protects your business when a customer fails to pay an invoice due to issues such as insolvency or protracted default.

Accounts receivable insurance (A/R) is typically purchased as an endorsement to a commercial property policy. It provides a financial safety net if your company's financial records are damaged or destroyed by a fire, flood, or other covered loss, impeding your ability to collect customer debts.

A/R insurance helps cover:

• Recovery costs, including IT services to recoup lost data and damaged records.
• Interest payments on loans to keep the business afloat during the recovery period.
• Collection costs, such as bookkeeping services, to follow up with customers and send payment reminders.

Trade credit insurance is a risk management tool used to protect your business from customer non-payment of invoices due to insolvency, bankruptcy, or protracted default.

When you need to submit a trade credit insurance claim, here's how it works:

1. Insurance carrier evaluates a policyholder's customers, looking at their financial health and setting credit limits.
2. If a customer fails to pay due to a covered reason, the policyholder files a claim.
3. The insurer pays a percentage of the unpaid debt, typically between 75% and 95%.
4. The insurer handles the legal and debt collection services to recover the bad debt.
5. The insurance provider continuously monitors customers and adjusts credit limits as needed.

Trade credit insurance covers many different types of non-payment claims, such as:

• An electronics wholesaler supplier extends $2 million in credit to a buyer with 180-day payment terms. Thirty days later, the buyer files for bankruptcy, leaving the debt unpaid. The insurance policy covers the loss, preventing a catastrophic blow to the distributor's cash flow.
• An accounting firm's biggest client has financial difficulties and stops paying invoices. After a defined waiting period, the insurer pays the claim to help the firm continue operating.
• A food manufacturer exports goods to a foreign buyer, but war breaks out and prevents the buyer from transferring payment or receiving goods. The trade credit policy covers this political risk.
• A commercial developer wants to expand sales but isn't sure about offering its current customers higher credit limits. Working with their trade credit insurance broker, the company is able to extend the amount of credit offered to customers without risk, allowing them to grow revenues.

Trade credit insurance is highly recommended for companies that sell goods and services to other businesses (B2B) on credit terms, to protect them from customer non-payment, manage credit risk, secure financing, and support company growth.

This type of coverage is popular with larger middle-market businesses that rely heavily on payment by invoice and would struggle to stay afloat if customer debts weren't paid within a certain amount of time.

Some of the top businesses that purchase trade credit insurance include:

• Manufacturing companies with high production costs and inventory risks.
• Wholesalers and distributors that manage large, diverse client portfolios.
• Financial institutions that need to secure receivables financing and trade finance.
• Technology companies that manage high-value, long-term contracts.
• Food and beverage companies that work with tight margins and perishable goods.
• Chemical, metal, and mining firms that work in commodity-driven industries.
• Construction businesses working on long-term projects with high insolvency risks.

On top of the peace of mind provided for non-payment risk, the benefits of trade credit insurance include:

• Strengthening and stabilizing cash flow
• Supporting company growth with competitive credit limits for customers
• Enhancing access to working capital with better financing terms
• Providing expert insights into commercial risk profiles of new and existing customers

Typically, a trade credit policy won't cover:

• Payment disputes over quality issues, damaged goods, or invoice terms
• Unauthorized credit limits
• Losses from buyers with pre-existing debts or known financial distress
• Noncompliance with contract terms or failure to obtain proper licensing to import/export goods

While trade credit insurance protects your business, surety bonds offer protection to a customer if your company fails to complete a project or fulfill the terms of a contract.

Many construction businesses, professional service providers, and insurance agents purchase surety bonds to meet legal requirements, land contracts, bid on projects, or to earn their customers' trust.