Trade credit insurance is designed for risk management and make sure that you trade on credit without any worries. You get an opportunity to attract domestic or foreign buyers with favorable credit terms. Account receivable insurance covers bad debts as well as ensures that your cash flow is steady and stable.
Trade credit policy reimburses if –
- Your customers go bankrupt or files insolvency or are unable to pay for other legal reasons.
- You lose contact with your customer or there is a court judgment issued against him/her.
The coverage ensures that you don’t lose on your trade and get paid by the insurer. The reimbursement amount depends on the debt value and insurance type. Some trade credit insurance is sold against political risk, which offers protection in the following situations.
- Assets seizures by a foreign government.
- Currency conversion and banking issues like the inability to transfer currency in your country.
- Contract breach by government.
- Political violence like terrorism or war or insurrection.
An extra benefit is if there is a need to file a lawsuit against a non-paying buyer, the associated legal costs get covered under the policy. In Sydney, Niche TC is a leading trade credit insurance broker with experience of three decades in offering complete credit solutions to businesses struggling with poor cash flow and risk management.
Coverage limitations differ as it is based on the coverage level purchased. Remember, customer disputes resulting in non-payment are not covered in the majority of the policies. If the order delivered is damaged or goes missing or is unsatisfactory and clients refuse to pay then the accounts receivable insurance policy will not be responsible for the reimbursement.
You will need to arbitrate and negotiate with buyers. Use a proper legal system to settle the disagreement with the customer.
During the purchase of account receivable insurance, the insurer offers a discretionary limit. A discretionary limit sketches the maximum credit limit a seller can give the buyer without any need for getting the insurer’s approval.
It means you cannot trade products on credit over the settled discretionary limit. You will need to notify the insurer. A credit check gets performed along with other evaluation before approving the transaction.
A common rate of premium is between 0.1 – 0.3 cents/dollar of overall revenue. It means if your sales per year are $5 million then expect to pay approximately $10,000 against insurance premiums. It can vary depending on your collecting bad debt history, companies you partner with, average transaction value, and several other variables.
Some essential steps involved in the underwriting process
- Each client associated with your business gets underwritten individually. The insurer evaluates the risk of each one to determine the possibility of default.
- The credit limit gets defined on each client’s transaction. It ensures you or the insurer doesn’t get overexposed to high risk.
- What happens when a client fails to pay gets defined in the policy?
- The underwriter works with you and determines the covered events and compensation percentage.
- After your approval, the coverage starts.
Now, you can focus on core activities with an assurance of getting coverage in case of payment default!