Shielding Businesses, Unleashing Growth: The Power of Trade Credit Insurance

Trade credit insurance is a game-changer for businesses, serving as a protective shield against the looming threat of non-payment by customers. This indispensable tool is particularly crucial for businesses that extend credit to their customers, offering them a safety net to mitigate the financial losses that can result from customer defaults.

Comprehensive trade credit insurance policies encompass various risks, including customer insolvency, non-payment, and even political risks. Insolvency refers to situations where a customer goes bankrupt or enters administration, while non-payment occurs when a customer is unable or unwilling to settle their dues for received goods or services. In export transactions, political risk cover becomes relevant, guarding against events such as war, civil unrest, or government intervention that can hinder businesses from receiving payments from foreign customers.

The cost of trade credit insurance is influenced by factors such as the business's size, industry, and the risk associated with its customer base. Typically offered as a Whole Turnover Policy, it can also be tailored to cover specific segments within an organization. Notably, entities recognized as Certified Micro or Small Enterprises by the MSME Department can opt for a credit insurance policy exclusively for a single buyer.

To dive deep into this insurance solution, we must first understand what exactly is a credit risk.. 

Credit Risk is the possibility of a loss resulting from default of a contractual obligation to pay by a buyer/customer/counterparty of the insured. Examples are: 

• Possibility of loss: This refers to the likelihood of experiencing a loss if a default occurs. Overdue debt is one example of a potential loss.
• Default: Default can be considered both as an event in itself and as a potential outcome resulting from other events. For instance, defaults can occur due to various factors such as the death of a business owner, natural calamities, lockdowns, political uncertainty, or terrorism.
• Contractual obligation to pay: This refers to a legally binding commitment to make payments, which is covered under the policy and is required to be fulfilled.
• Buyer/Customer/Counterparty: This term encompasses a range of entities including listed and non-listed companies, public organizations, sovereign entities, and sub-sovereign entities.

A trade credit insurance policy thus serves multiple benefits. Here are some: 

Enhanced Cash Flow Management: A key advantage of trade credit insurance is its ability to empower businesses with effective cash flow management.

Confidence to Offer Favorable Credit Terms: By safeguarding against non-payment risks, businesses can confidently extend credit to customers, fostering stronger relationships and increased customer satisfaction.

Expanding Customer Base: With the assurance of a trade credit policy mitigating exposure, businesses can extend favorable credit terms to a wider range of customers. This paves the way for business expansion and increased sales without incurring undue financial risk.

Facilitating Access to Competitive Financing: Trade credit insurance plays a vital role in facilitating businesses' access to financing. Banks are more inclined to provide funds to businesses equipped with trade credit insurance, as it offers an additional layer of security against defaults. This advantage proves especially valuable for businesses seeking expansion or investing in new equipment and technology.

Effective Credit Risk Management: Trade credit insurance empowers businesses to proactively manage credit risks. By providing detailed information on the creditworthiness of potential customers, trade credit insurers enable businesses to make informed decisions about extending credit. This helps reduce the risk of non-payment and safeguards businesses against bad debts.

Reliable Debt Recovery Assistance: In the unfortunate event of non-payment by a customer, credit insurers step in to assist with the recovery process. Their expertise ensures that policyholders receive adequate support during the recovery activity, keeping claim ratios in check. Additionally, successful debt recovery allows businesses to resume trading with the same customer, promoting customer retention.

Trade credit insurance is an invaluable tool for businesses that engage in credit sales. It acts as a safety net against non-payment risks, enhances cash flow management, facilitates access to financing, and empowers businesses to make informed credit decisions. As an integral part of any robust risk management strategy, trade credit insurance is worth serious consideration for all businesses operating on credit. Stay tuned to our #DecodingTradeCreditInsurance series for more information and knowledge on this interesting insurance offering.