This blog will explore the nuances of trade credit insurance, its advantages, and how incorporating it can enhance your company's financial resilience.
Trade Credit Insurance – how it works
Trade credit insurance protects your company from the negative impact of unpaid invoices by providing:
- Risk mitigation: When you extend credit to customers, there's always a chance of late payments, insolvencies, or defaults. Trade credit insurance ensures you receive payment even if your customer faces financial difficulties.
- Credit limits and monitoring: Insurers evaluate your buyers' financial health and set credit limits, determining the maximum amount you can invoice a customer. They continuously monitor your customers throughout the policy and adjust credit limits as needed.
- Debt collection: If a customer fails to pay within the agreed-upon period, typically 30 days, you can notify the insurer, who will handle the debt collection on your behalf.
- Claim process: In cases of insolvency or prolonged default, you can file a claim with the insurer to recover the outstanding debt.
The main benefits of Trade Credit Insurance
Trade credit insurance enables businesses to operate without worrying about payment delays or defaults. It achieves this through:
- Cash flow stability: Trade credit insurance ensures a steady cash flow by safeguarding your receivables. Knowing that your bottom line remains protected, you can confidently extend credit to new customers.
- Access to funding: Lenders often view businesses with credit insurance more favourably. Having this coverage can improve your access to financing at competitive rates.
- Risk diversification: Trade credit insurance is crucial in diversifying your risk portfolio. Instead of relying solely on a few large customers, this insurance allows you to expand your customer base while managing risk effectively. This strategic approach to risk management can significantly enhance your business's stability and growth potential.
- Protection against political risks: Beyond late payments, credit insurance covers risks arising from political events, such as sanctions due to war or natural disasters.
Trade Credit Insurance – how to make a claim
Trade credit insurance protects your business from the potential risk of a buyer not paying their invoice within the agreed period. This situation can arise if the buyer refuses to pay, struggles to meet the invoice terms, or becomes insolvent.
The key to making a claim is the Maximum Extension Period (MEP). The MEP represents the maximum due date extension allowed under a policy when granting a credit term longer than initially agreed. In other words, it defines the additional time beyond the standard payment terms when a buyer can settle their debt without triggering a claim. The account becomes overdue once the buyer exceeds the MEP without making payment, and the insurer must be notified. This triggers the claims process.
When notifying a claim, along with a summary of the situation, your insurer will review indemnity to ensure there has been no breach of the policy conditions. Your insurer will then require as a starting point copies of the following documentation to consider the extent of the claim:
- Proof that the buyer has not paid
- Account statements, along with the terms & conditions (T&Cs)
- A copy of the order and invoice
- Evidence that the product/service had been provided by the client.
Your insurer is also likely to request additional information, such as insolvency information if the buyer has been declared insolvent or details of Retention of Title (ROT) if this applies. This is more likely for retail businesses.
The key with trade credit is to ensure that as soon as a buyer breaches your payment terms, you must follow the T&Cs attached to the invoice.
Trade Credit Insurance – why you need it
Unpaid and overdue invoices can significantly impact your business. Trade credit insurance acts as a safety net, safeguarding your company against unpaid debt. It ensures that you receive payment even if a customer faces financial difficulties.
Trade Credit Insurance also supports your working capital requirements, so you can confidently extend credit to new customers, knowing that your cash flow remains stable. Having credit insurance also encourages prudent credit management practices. Insurers assess the financial health of your buyers and set credit limits. This discipline helps you make informed decisions about extending credit.
Finally, trade credit insurance allows you to explore new markets and customer segments as your business expands. It diversifies your risk portfolio, reducing reliance on a few large customers.
Contact us
If you'd like to discuss trade credit insurance with one of our specialists, please call: 020 7280 3450 or email: enquiries@thecleargroup.com
