Understanding Trade Credit Insurance

Trade credit insurance policies provide business organisations with protection against bad debts and late payments. In the UK, the majority of trade credit policies are bought for cover against bad debts due to insolvency. In addition to safeguarding a business from late payment, trade credit policies can also have the added benefit of improving an organisation’s credit-worthiness.

How trade credit insurance works

Credit insurers tend to tailor their policies to suit the needs of an individual business, although this will generally mean covering them for between 75% and 95% of debt. Some policies will insure all debtors, whilst others may be restricted to a selection.

Credit insurers will expect a client business organisation’s internal in-house credit management policies to be robust and strictly adhered to. This will help to satisfy them that the extent of risk is minimal. However, some credit insurers may require organisations to adopt their own credit checking systems before agreeing to issue any form of insurance policy. Naturally, the efficiency of a business’s credit management system can be a key factor in influencing the cost of any premium.

Export specific trade credit insurance

Credit insurers can underwrite policies that are specifically designed to insure business organisations against bad debts and late payment from foreign customers. Indeed, some policies will cover both domestic and overseas credit risks. In general, the cost of export credit insurance policies will not be much greater than that of domestic trade insurance policies when it comes to insuring countries that operate out of stable countries like the United States and France. However, export credit insurance policies covering less reliable countries may well be more expensive.

Without doubt, effective trade credit insurance can help business organisations to significantly reduce any financial impact which may come from their foreign or domestic customers defaulting on their payments.

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