Trade credit insurance protects your business from bad debts.
It insures your accounts receivable and protects your business from unpaid invoices caused by customer bankruptcy, default, political risks, or other reasons agreed with your insurer. It’s also known as debtor insurance, export credit insurance and accounts receivable insurance.
How does trade credit insurance work?
No matter how careful you are, your customers can sometimes fail to pay. Unless you demand payment up front or are covered by credit insurance, this makes you vulnerable to bad debt. Can your business afford a bad debt? Credit insurance protects your cash flow. It covers your trade with your customers, so that you still get paid even if they go under or fail to pay you.
Trade credit insurance works by insuring you against your buyer failing to pay, so every invoice with that customer is covered for the insurance year. It’s used by businesses of all sizes to protect both international and domestic trade. Businesses also use credit insurance to help them secure finance and working capital with banks, explore new markets with confidence and attract new customers with favourable credit terms.
As with all types of insurance, there is no one size fits all approach. The level and cost of your credit insurance will be dictated by your needs. For example the size of your credit portfolio, level of risk associated with your customers and location of your market will be unique to your business. Most trade credit insurance solutions will therefore be tailored to your requirements.
At Atradius Australia, we operate a Modula Credit Insurance Policy. This allows us to tailor the policy to your needs.
Atradius Credit Insurance explained:
Operating your credit insurance policy
Step one: Agree credit terms with your customer and insurer
Your trade credit insurer should monitor the financial health of your customers and potential customers and apply a risk rating, often called a buyer rating. This is their assessment of how likely your customers are to pay your invoices on time. It will guide how much of your exposure they are prepared to insure.
The buyer rating is also a useful tool for you. You can use it as a guide to support your own due diligence and help you avoid potentially risky customers. A strong buyer rating can also help you secure potential buyers by offering them favourable credit terms.
Step two: Trade with confidence
Continue with business as usual. Some insurers will leave you alone. Some will provide ongoing support. At Atradius Australia, we’ll share the market knowledge and expertise of our underwriters with you through regular trading reports and sector analysis.
Step three: Deal with an unpaid invoice
Not paid? Let your insurer know. Most insurers will first try to recover the debt. Ideally their first approach will be amicable. Your customer may just need extra time to pay up, or they may want to renegotiate payment terms.
If your insurer offers a debt collection service as part of your insurance package they will start debt collection procedures. For example, if your customer has gone bankrupt they will deal with a receiver or liquidator on your behalf.
If the debt is impossible to recover, your insurer should pay up in line with your policy, often up to 90% of the debt. Whether through debt collection or insurance you should get all or most of the money owed to you.
Benefits of trade credit insurance
Protecting your accounts receivable from potential bankruptcy is only part of the benefit this type of debtor insurance can provide. In addition to protecting your business from the risk of insolvency, it can help:
- Grow your customer base as potential buyers may be attracted to your credit terms
- Enhance trade providing you with the confidence to develop and expand your market
- Guarantee cashflow enabling you to build strong relationships with your suppliers and employees
- Safeguard customer relationships through improved communication and enhanced credit terms
- Improve your access to finance and your relationship with your bank
- Meet the risk management requirements of your stakeholders or board and provide peace of mind
You can use credit insurance as a tax-deductible business service. It can be a requirement of your management board and you might find it a great asset when seeking finance from banks. Credit insurance is suitable for all businesses, from SMEs to large multinationals.