What is Trade Credit Insurance?

Trade credit insurance protects businesses from the risk of their customers failing to pay for goods or services they’ve provided on credit. In other words, it helps businesses manage the financial risk associated with extending credit to buyers, especially when they sell goods or services and allow customers to pay later. It can cover both domestic and export sales.

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Here’s how it works:

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1. Coverage: Trade credit insurance typically covers losses due to non-payment caused by insolvency, bankruptcy, or other financial difficulties of the buyer. Some policies may also cover payment defaults for reasons like protracted default or political risks, especially in international trade.

2. Risk Mitigation: It helps businesses protect themselves from bad debts. If a customer fails to pay or goes bankrupt, the insurer compensates the business for the unpaid amount (often a significant portion, like 80-90%).

3. Customer Assessment: Insurers often assess the creditworthiness of a business's customers before providing insurance. This helps the insured business evaluate the financial health of its clients and reduce the risk of extending credit to unreliable customers.

4. Claims Process: If a customer doesn't pay within a certain period (due to insolvency, bankruptcy, etc.), the insured business can file a claim with the insurance provider. The insurer will then compensate the business for a portion of the outstanding debt, depending on the terms of the policy.

5. Benefits:

   • Improved Cash Flow: Helps businesses maintain cash flow by reducing the risk of unpaid invoices.

   • Access to Financing: Lenders are more likely to offer credit to businesses with trade credit insurance, as the risk of non-payment is mitigated.

   • Risk Diversification: Companies can expand their customer base with more confidence, knowing that they have protection against potential non-payment.

 

Trade credit insurance is a safety net that allows businesses to grow, trade more confidently, and offer credit to customers without constantly worrying about the possibility of non-payment.

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NEXT: The Seven Benefits of Trade Credit Insurance for B2B Companies

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