Trade Credit

You have clients throughout the world.
What happens when one of your clients become insolvent and cannot proceed with their orders?

What is Trade Credit Insurance?

Companies that sell products or services on credit terms are deemed as providing trade credit. This is applicable to both international and domestic sales where the buyer is part of the risk of doing business. In essence, Trade credit insurance protects you from non-payment from the buyer. This can be caused by a variety of circumstances, including commercial or political events such as insolvency or protracted default. Disruptive political events such as wars, embargoes and currency inconvertibility can also lead to non-payment on overseas transactions.

What does Trade Credit Insurance cover?

In simple terms, trade credit provides coverage when a customer either becomes insolvent or does not pay its debts after a certain period (which is set out in the insurance policy). Essentially it protects against the following:


  • Unforeseen credit losses in accounts receivable
  • Insolvency 
  • Protracted default
  • Political risks (government moratorium, contract frustration, discharge of debt, war, transfer, public buyer default)
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What are the benefits of a Trade Credit Insurance policy?

There are a wide range of perks that comes with a Trade Credit policy. Below are some of the advantages: 

  • Sales expansion: Increase sales by allowing larger credit limits and more liberal payment terms.
  • Enhance asset valuation: Get up to 90-95% coverage on your accounts receivable.
  • Improve profitability: Reduce earnings volatility related to bad debt expense.
  • Increase working capital: Reduce bad debts reserves and transfer the amount to your working capital.
  • Enter new markets:Mitigate emerging market political risks on international sales. 
  • Credit enhancement: Replace your buyer’s credit rating with “A+” rating of your insurer.
  • Access to financing: Obtain better terms and borrowing capacity on your credit facilities from financial institutions by including export sales and alleviating buyer risk concentration issues.
  • Risk transfer: Transfer nonpayment risk on your accounts receivable to the insurer.
  • Second opinion: Enhance your credit risk decisions with a valuable second opinion.

Is Trade Credit Insurance Insurance important?

Trade credit insurance provides protection against demand fluctuations, natural disasters, harsh economies and customer non-payment. The risks of non-payment are greater than ever and disruption in cash flow can affect your business obligations, such as expanding markets geographically.

Who needs Trade Credit Insurance?

Trade credit can be helpful to a number of different types of businesses. It can apply to businesses trading domestically or internationally and can be suitable for a number of industries, including manufacturing, retail, wholesale and more.
 
The following are some examples of types of how certain types of businesses may find trade credit useful:

Construction firm: The customer of a construction firm suddenly went into insolvency, catching the company by surprise. This meant there was no time to reduce the company's credit exposure, but due to the trade credit policy, cashflow was swiftly secured.

Multinational company: Taking on a trade credit policy when having business relationships across the world allows access to information of different customers credit score. This ensures that the firms a not taking on unnceccesary risks.

SME: A bespoke SME producing manufacturing goods may experience non payments from factories, suppliers and distributors. Having a trade credit policy allows them to evaluate their customer's financial health as well as evaluate the risk of doing business with a potential customer.

Exporter: An exporter will always have risks of an importer's inability to pay. Having a trade credit insurance not only protects against such risks, but demonstrate a prudent approach to banks allowing an ability to seek increases in their trade finance.

How much does a Trade Credit Insurance policy cost?

There are a number of factors that insurers take into account when determining the price of a Trade Credit policy. The factors are as follows:

Turnover: The most important element in determining the price. 

Trading history: Although a poor trade history does not necessarily increase the cost, should your track record with partners, suppliers and receivables history be exemplary, it can lead to lower premiums.  

Market outlook: Market outlook and future demand can depict future stability. A stable outlook is less risky, which may help minimize the cost of a trade credit policy.

Sector: The overall market volatility, seasonality and outside market influences in the industry you do business with will be considered when determining premium cost.

Credit terms: Both the amount of credit extended and the repayment terms will play a part in determining the price of the policy. A compelling benefit a Trade Credit policy possesses is that Trade Credit agencies will provide expert analysis in terms of how different amounts of credit impact your overall exposure.

Customer ratings: Your main customers will be evaluated based on their credit-worthiness and trade history. This evaluation is based on publicly available information and thus is probed in incognito.

Countries: The state of the infrastructure, politics and international conflicts in the nations in which your customers are located can influence the policy pricing.

Policy structure: Different organizations have different needs and therefore the construction of each policy is tailored to those requirements. Coverage is based on modules or building blocks, and these modules have varying levels of risk which affects the price of the policy.

Why CHAZ?

 A trade credit policy may require substantial amount of information of the clients customers and can be quite complicated. At CHAZ, we can cooperate with insurers on behalf to ensure that all the risks are taken with the correct approach.

Important Disclosure

The content provided is for informational and educational purposes only. The coverage written may not be applicable to all situations and policies. Terms, conditions and qualifications are also subject to circumstance and supplementary material. For more information, please contact us via the enquiry form below..

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