If you are interested in an insurance product like trade credit insurance as a way to simplify risk management and protect your balance sheet from protracted default, you probably have quite a few questions.
For example, what is a pre credit loss? What does it mean – and why do you need a policy that includes pre credit coverage? In this article, we’ll discuss the basics of pre credit loss in credit insurance, and why it’s important for credit management, avoiding bad debt and protecting your cash flow.
Defining Pre Credit Risk
Pre credit risk is, essentially, the risk that your buyer will cancel or will be unable to honor the contract terms before your products are delivered.
For example, if you create and manufacture a custom product that has a six-month production time, and your buyer goes bankrupt before the products can be delivered, this is a pre credit loss.
The same is true of products that can no longer be shipped due to political risk, such as civil unrest or banking issues. These are also covered in the terms of pre credit risk insurance.
Without working with insurance companies for pre credit risk insurance as part of a trade credit insurance policy, you may find yourself in a difficult situation where your buyer cancels the contract, but you are unable to get compensation for your products.
Pre Credit Loss – Losses Caused Before Delivery Of Goods/Completion Of Contract
There will typically be a waiting period of about 30 days before you are compensated. This may vary based on your insurer. Trade credit insurance policies typically will reimburse you for all working costs and losses you sustain as a result of the pre credit loss, including:
- Production costs
- Net of profit margin
- Advance payments which you cannot recoup due to the buyer cancelling the contract
Usually, however, you will not be compensated fully, but with a payment calculated as a percentage of your loss. For example, your trade credit insurance policy may compensate you for 85% of your loss, as outlined in your policy, within your credit limit for the particular buyer.
The Importance Of Pre Credit Insurance Coverage
So, why is pre credit insurance such an important part of trade credit insurance, and a valuable method of credit management? Here are a few reasons it’s such a useful insurance product.
- Reduces risk of taking on long-term projects – With pre credit insurance coverage, you can take on long-term manufacturing projects without worrying about your buyer defaulting – reducing risk and allowing you to take more complicated projects from your buyers.
- Protects your cash flow – You won’t have to worry about losing money due to buyers breaking your contract – your cash flow will be protected and you’ll be compensated for your losses.
- Comprehensive coverage – Pre credit insurance coverage doesn’t just compensate you for your profits, but also for costs incurred when designing, developing, manufacturing and transporting your products – and more.
Learn More About The Benefits Of Pre Credit Loss From Niche Trade Credit!
At Niche Trade Credit, we specialise in providing our customers with the insurance they need to protect their businesses in Australia. As a leading trade credit insurance broker, we can help you understand everything you need to know about trade credit insurance – and pick the policy that’s right for you. Contact us now to get started, by calling 02 8416 0670.
*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.