Trade credit insurance is a business insurance product that indemnifies a seller against losses from non-payment of a commercial trade debt. With trade credit insurance in place, the seller/policyholder can be certain that non-disputed accounts receivable will be paid by either the debtor or the credit insurer.
Trade credit insurance is a financial tool to hedge against both commercial and political risks that are beyond a company's control. Balance sheet strength is ensured, cash flows are protected, and loan servicing and repayments are enhanced.
A trade credit insurance policy also allows companies to feel secure in extending more credit to current customers, or to pursue new, larger customers that would have otherwise seemed too risky.
The protection it provides allows a company to increase sales to grow their business. Insured companies can sell on open account terms which, for exporters especially, can be a major competitive advantage.
Trade credit insurance is a financial tool to hedge against both commercial and political risks that are beyond a company's control. Balance sheet strength is ensured, cash flows are protected, and loan servicing and repayments are enhanced.
A trade credit insurance policy also allows companies to feel secure in extending more credit to current customers, or to pursue new, larger customers that would have otherwise seemed too risky.
The protection it provides allows a company to increase sales to grow their business. Insured companies can sell on open account terms which, for exporters especially, can be a major competitive advantage.
Companies invest in trade credit insurance for a variety of reasons – including:
- Sales expansion: If receivables are insured, a company can safely sell more to existing customers OR go after new customers that may have been too risky without insurance.
- Expansion into new international markets
- Better financing terms – In many cases, a bank will lend more capital against insured receivables, and may also reduce the cost of funds.
- Reduce bad-debt reserves – This frees up cash for the company. Also, trade credit insurance premiums are tax deductible, but bad debt reserves are not.
- Indemnification from customer non-payment.
A wholesaler company’s credit department had granted a credit line of $100,000 to a customer. They then purchased a trade credit insurance policy and the insured approved a limit of $150,000 on that same customer.
With a 15% margin and an average DSO of 45 days, the wholesaler was able to increase their sales to realize an incremental annual gross profit of $60,000 on just that one account.
