As a risk management tool, trade credit insurance is extremely powerful. Trade credit insurance protects your cash flow by insuring you against credit risk. When clients or customers fail to pay for goods or services on credit and enter protracted default, trade credit insurance safeguards your working capital – providing compensation for your accounts receivable, and keeping your balance sheet healthy.
This allows you to avoid bad debts in your credit portfolio, and also helps protect you from some political risks when working in developing countries. However, there are some common terms that you usually must abide by when you implement a trade credit insurance policy at your company. We’ll explain these terms and requirements below.
1. Credit Limits When Extending Internal Credit
As part of your credit management strategy, your company should already be implementing internal credit limits for customers, as this helps ensure your balance sheet is not composed of only a handful of companies.
However, trade credit insurers will require proof and documentation of these credit limits to provide you with a policy. If you do not abide by the stated credit limits of your policy when selling to your customers, you will breach your insurance contract, and will not be eligible for compensation from your trade credit insurer due to bad debts.
2. Rate Of Coverage
Rate of coverage is another important term of most policies you’ll find on the trade credit insurance market. Insurers are usually willing to insure your invoices for between 70-95% of their cost.
In other words, if you are insured by a trade credit policy and a customer does not pay for a shipment, you can recover that percentage of the debt. The proper rate of coverage depends on what you’re selling. High-margin goods like toys or bicycles can be covered with a lower rate of coverage, while low-margin goods like oil or metals should be insured for a higher rate of coverage.
3. Persistent Default And Debt Collection
Before you can file a claim with your trade credit insurance company, the debt collection process must begin. The company you’re working with must enter a period of persistent default before you can file a claim. For example, if you sold goods on “net 30” terms, and you have not yet been paid even after 60 days, you can file a claim.
Then, your guarantor – the trade credit insurance company – will attempt to collect payment from the non-complying company, usually for a period of up to 6 months after product delivery.
If they cannot secure payment, the firm that failed to pay will be indemnified on the terms of the policy, and your company will receive payment.
4. Payouts Due To Liquidation Or Bankruptcy
Your trade credit insurance policy also covers corporate liquidation and/or bankruptcy. If the company with which you have been trading has failed to pay on your credit terms and has been found to be insolvent or bankrupt, you will usually receive compensation from your insurance company within 30 days of filing a claim.
Consult With Us To Learn More About Trade Credit Insurance Terms!
Each insurer is different, and their terms and conditions for insuring your invoices may vary somewhat. So if you have more questions or want to find the trade credit insurance policy that’s right for you, we recommend you contact our Niche Trade Credit insurance broker right away. Our experts can help you learn more, and find the right policy.
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