The risk of debtor insolvency is an inherent part of owning a business. Sometimes your customers simply do not or cannot pay you—it is unavoidable and could be disastrous for your company. A trade credit insurance policy could help your business survive.
Trade credit insurance, or credit insurance, provides your business with protection against the failure of your customers to pay their debts and substantial delays in receiving their payments. What may seem catastrophic at first is completely bearable with adequate trade credit cover.
Purchasing trade credit insurance can help save your business from crippling bad debt. As globalisation continues to lengthen businesses’ supply chains and expand their customer bases beyond national borders, debtors and creditors continue to grow further apart. This makes it easier to lose track of your customers and presents more obstacles for their payments, such as government restrictions or political instability abroad. Trade credit insurance can protect against the various risks of trading across borders.
Not receiving customers’ payments on time—or at all—could be fatal for your business, but trade credit insurance helps transfer that risk. Policies typically cover about 90 per cent of customers’ outstanding debts, so the failure of one large customer or multiple small ones will not overwhelm your organisation.
Trade credit insurance is a small, specialised field that requires careful risk assessment. A precise assessment will create an effective insurance policy that keeps you above water when your customers go under.
There are two main types of trade credit insurance:
- Whole turnover covers the insured’s entire book of debtors, providing the maximum level of protection against bad debt.
- Specific account applies only to those accounts the insured feels are at risk. These policies may be subject to an increased premium, and are riskier than whole turnover cover, since the insured may choose incorrectly and fail to insure an account that defaults.
In order to be effective, trade credit insurance policies should be tailored to your business and list of debtors. Typical extensions to provide a bespoke policy, include:
- Pre-delivery work in progress, which safeguards against the insured’s financial losses due to a customer becoming insolvent before work is completed but after the insured has incurred costs such as material or labour. If a project goes bust, the insured is not left to shoulder the debt and pick up the pieces.
- Supplier default, which protects against financial losses from a supplier going out of business. This includes the costs associated with finding new suppliers, the loss of advance payments to the defunct supplier and any possible fines or damages for late delivery.
As your business grows and develops, your insurance needs will undoubtedly change. FOCUS will work with you to ensure that the exposure and risks faced by your business will be protected, leaving you with complete peace of mind.
To find out more, contact us.