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Three Reasons to Have Trade Credit Insurance

By November 26, 2018 No Comments

Three Reasons to Have Trade Credit InsuranceNiche Trade Credit (NTC) knows that trading goods and services on credit is always associated with risk. Trade credit insurance can protect your accounts receivable from taking a hit when a client is unable to pay. The most common types of credit risks covered are;

  • Protracted Default
  • Insolvency
  • Liquidation

As part of a comprehensive credit portfolio, we at NTC offer policies that protect your cash flow and working capital. Spending time tied up with debt collections services is not only time that could be better utilized but doesn’t guarantee prompt payment. We know the value of risk management and the danger even one failed remittance can represent, especially for a new enterprise. Trade credit insurance policies can be combined with political risk insurance representing a powerful means to mitigate the potential fallout.

Protracted Default

If you’re considering expanding credit to existing customers, entering into emerging markets or other beneficial arrangements leveraging credit, you may need trade credit insurance. During the financial crisis of 2008, the number of credit defaults hit an all-time high globally. Companies that find themselves in financial hardship will typically first look to “squeeze” their vendors hoping to get by. Payments for raw materials are often made late or not at all when a company is facing limited cash flow.

The economy is cyclic. Most economists and pundits believe we are overdue for another recession. Companies who hold a few key customers, (less than 10 that make up a majority of their sales) are at greatest risk. If and when another recession comes, credit will falter. Customers that normally pay on time may see extending their obligations as a way to help themselves at your expense.

Insolvency

We at NTC know you investigate customers in order to avoid bad debts. Even the most astute analysis is based on limited information. This is especially true for international customers and those in emerging markets. Predicting future insolvency is a difficult proposition. It typically precedes liquidation (bankruptcy) and often finds the company going through voluntary liquidation, administration, or receivership.

During an insolvency, the company in question will typically try to negotiate with creditors for reduced payments and other arrangements to avoid liquidation. In Australia, this often takes the form of a deed of company arrangement (DOCA). The process is similar in many other nations as it is so common.

Usually companies do not fail overnight. The warning signs and process can take many years to finally end with a successful restructuring or a liquidation. Trade credit insurance removes your company from this danger and the complications that go with negotiating for payment or fighting other legal devices that can ultimately in debt you to your debtor.

Liquidation

Global bankruptcy, liquidation in the business context for Australia, is on track for a 3% rise in 2018. The legal protections afforded by this process make payments for good and services highly unlikely. Trade credit insurance is specifically designed to protect your company from this event. It often comes with little or no warning. Managers and directors will not wish to advertise this potentially panic inducing information. Publicly traded companies are more transparent by virtue of their structure but their proportion to privately held interests is in decline. Since 2013 roughly two thousand publicly traded companies have disappeared serving to widen the disparity.

Liquidation has been cited as the most common reason for nonpayment to credit holding vendors. In addition to the risk of nonpayment, a vendor might find themselves defending against a preference claim. In this scenario, payments or transfers of assets made prior to the liquidation of the customer are called into question. In these cases the claim is levied against your business essentially alleging money is owed to another creditor. The argument is that the other creditor should have been paid before you were. In other words, the creditor asserting the claim has, “preference” to your claim against the liquidated company.

Trade credit insurance is one of the oldest and most well-structured forms of insurance available today. It was originally developed in 19th century Europe to promote trade with other nations. Ensuring payment can not only provide security, but may also serve to convince potential investors to collaborate with you.

Crafting policies is essentially a risk assessment. Our specialists will factor the relative risk represented by your customers and tailor a product that is right for you. Whether your business is large, small, international or domestic, we can optimize your trade credit policy. NTC premiums and benefits are calculated as a percentage of risk and represent the best value for the services offered.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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