If you’re interested in protecting your accounts receivable and engaging in risk management for your company, to protect yourself from bad debt, political risks, or other issues with an export transaction, you may be interested in trade credit insurance from a large insurance group.
Trade credit insurance protects your cash flow and profitability if a customer who buys goods or services fails to pay due to protracted default or bankruptcy. If this happens, your insurance company steps in, and compensates you for this loss.
One of the terms you may have seen while trying to decide if a product from an insurance company is “discretionary credit limit.” If you’re wondering what this means, read on, and find out.
Understanding Trade Insurance Discretionary Limits
Unless you choose to insure a single invoice or customer, most insurance companies will insure all of your invoices and accounts receivable, with the fee calculated as a percentage of the total outstanding debt. This figure is also affected by the creditworthiness of each client.
Using credit control management tools and internal credit management processes, your insurance company will likely set what’s known as a “discretionary credit limit,” which will be outlined in your insurance product disclosure statement.
This limit is the maximum amount of business that you can do with any single buyer, without the formal approval of the insurer, and it’s also subject to the obtaining of satisfactory credit references.
In essence, a trade insurance discretionary limit is meant to make sure that you do not issue lines of credit to larger debtors, over an amount agreed upon in your insurance contract, without first consulting with the insurance company.
To boil it down into simple English, any transaction that is made over your discretionary limit – and without consulting your insurance provider for credit approval – may not be covered under your trade credit insurance policy.
What’s The Purpose Of A Trade Insurance Discretionary Limit?
Your insurance company has only agreed to take on a certain amount of risk for your accounts receivable – based on factors like your average transaction value, the countries in which you operate, and your percentage of coverage.
Because of this, their business could be endangered if a company starts issuing large lines of credit to companies which could be risky, or do not have a history of timely payment.
The trade insurance discretionary limit is meant to help mitigate that risk, by setting forth guidelines about how much credit a vendor or exporter can issue, without the express approval of their insurer.
What If I Need To Exceed My Trade Insurance Discretionary Limits?
As your company continues to grow, you’re likely to have issues with your discretionary limit, as your sales volumes get larger. But these are easily solved.
When a large transaction must occur, you simply must contact your insurance company to approve the invoice and the transaction, based on your customers’ creditworthiness.
In addition, as your company grows, your insurance company may choose to expand your discretionary limit, particularly if you have not had to file any claims recently. This gives you more business flexibility.
Got More Questions About Discretionary Limits? We Can Help!
We understand that navigating the world of trade credit insurance isn’t always easy. But at Niche Trade Credit, we’ve been experts in the field for more than 30 years. We can clear up any other questions you have about discretionary limits, and help you find the right trade credit insurance policy for your business. Contact us today to learn more!
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