GUEST BLOG: What Is Trade Credit Insurance?

This guest blog post is brought to you by Prasidium Credit Insurance, credit insurance broking company focused on providing our clients with flexible solutions, tailored specifically to their needs with ongoing support and advice which plays a crucial role in a company’s trade development and strategy.

What is Trade Credit Insurance?

Trade Credit Insurance (also known as Debtors Insurance) protects businesses from bad debts. It ensures accounts receivable and protects businesses from unpaid invoices caused by customer insolvency and Protracted Default. For most businesses, the value of the debtor’s ledger, the money you are owed, is one of the largest assets and yet it is often not insured.

Most businesses ensure other important assets without hesitation, yet the risk to a business of customer insolvency can be one of the most unpredictable exposures.

How does Trade Credit Insurance work?

Trade credit insurance works by insuring you against your buyer failing to pay, so every invoice with that customer is insurable for the insurance year. A typical policy includes an excess as low as $2,500 and 90% coverage. If you have to claim on the policy due to a customer’s failure to pay, the excess is deducted and 90% indemnity applies. E.g. $100,000 ‘net bad debt’, minus $2,500 = $97,500 x 90% indemnity = claim payment of $87,750.

Even the most disciplined credit management cannot prevent bad debts and no matter how careful you are, your customers can sometimes fail to pay. Unless you demand payment upfront or are covered by credit insurance, this makes you vulnerable to bad debt. Ask yourself, what would be the impact of one of your largest customers failing to pay you?

Who is it suited to and how do I get a quote?

Any business selling goods and services on credit terms with exposures to bad debts should strongly consider trade credit insurance as part of their business risk strategy. Self-insurance or a bad debt reserve does not replace monies lost, whereas trade credit insurance puts cashback in your hands.

Trade Credit Insurance is heavily used in the Building and Construction sector and used by businesses of all sizes with minimum annual turnover usually starting around $750,000 upwards.

There is no ‘one size fits all’ approach when it comes to Trade Credit Insurance and the level and cost of your policy will be dictated by your needs. Trade credit insurance is a highly specialised area of insurance and it’s vital that you deal with a Specialist Trade Credit Insurance broker like Pradsidium Credit Insurance to place and manage your insurance needs.

Key benefits:

Swift access to replacement capital

In the event of insolvency of non-payment of a customer, credit insurance provides you with swift access to replacement capital, protecting your cash flow, before permanent damage is done to your business.

Protect hard-earned profits

A $100,000 loss on 10% profit margin is $1,000,000 in lost sales! How would your business cope if one or two of your major customers fell over? Give yourself peace of mind knowing all your hard work is protected and you cannot be affected by a bad debt by transferring the risk of non-payment to an insurer.

Increase sales to existing and new clients

A trade credit insurance policy can provide you with support and confidence to extend larger credit limits, more favourable trading terms and alleviate buyer concentration risk issues. Gain a competitive advantage in the market because your competitors are!

Improve credit management

Obtain greater access to information on your customers having an insurer assess the credit risk. The normal channels of trade references and trading history bear less weight in assessing credit risk. In today’s environment, it’s not uncommon for a long-standing company to fall insolvent showing no signs of distress and paying within terms. A credit insurance policy will provide you with far greater access to information than you would otherwise be able to obtain.

Improve access to finance

Is your sales volume creating working capital restraint? Struggling with cash flow difficulties? Trade credit insurance can support and strengthen access to credit facilities from financial institutions who can be named on the policy as a loss payee. A policy may help reduce financing costs.

Strengthen the balance sheet

Replace your bad debt provision with a trade credit insurance policy to improve the balance sheet and inject those funds back into the business as working capital. The trade-credit insurance premium is tax-deductible and you will receive a much larger reserve than you would otherwise carry. Funds are placed back into the business through a claim payment, rather than taking out unrecoverable money from a bad debt provision.

Tradies Accountant