All about Trade Credit Insurance

All about Trade Credit Insurance

Trade credit insurance is the best way to manage trade credit risk and prevent cash flow problems. It accelerates your business development and reduces the risk of trade credit affecting your cash flow.

Credit insurance Australia ensures that you get paid quickly in the case of a bad loan. This improves your working capital ratio, reduces uncertainty about cash inflows, and gives you the confidence to share your financial stability with your shareholders or bankers.

Get Started with a Trade Credit Insurance Policy

The carrier will evaluate the creditworthiness of the policyholder and their financial stability. They will then assign a credit limit to them, which is the amount they will insure if the insured customer defaults on payment.

Contrary to other types of business insurance policies, once a company has purchased trade credit insurance coverage, it does not get filed away until the next year’s renewal. The relationship is dynamic.

Trades with existing customers are covered up to the limit. The insurer’s internal resources and expertise can help you determine the solvency and creditworthiness of your customers. This will enable you to identify potential bad payers.

Compare Trade Credit Insurance with Other Options

A business can also use self-insurance to cover any bad debts that may arise during the fiscal year. This is not the best solution as it prevents excess capital from being invested into growth opportunities. Instead, the business must hold it in case of bad loans.

Another option is a letter of credit, which does not provide debt protection and covers only international trade.

Factoring insurance for receivables is another option. This agreement allows third-party companies to purchase receivables at less than the invoice face value. The factor will provide a cash advance of 70% to 90% of the invoice value. The factor will return the invoice’s balance less their fee when it is collected. Based on a number of components, these costs can range from 1% up to 10%.

While some factoring services may assume the risk of invoices not being paid, others will not. AR factoring is a great option if you have cash flow problems and need to quickly collect receivables.

You can work with your bank to get funding, but you don’t want to pay any fees. The funding will be provided by the bank or factor, and the credit insurance policy will cover the invoices. If a funded invoice is not paid, the claim payment will be made to the funder.

What is not covered by Trade Credit Insurance? Trade credit insurance does not cover business-to-business accounts due from political and commercial risks. Except for direct trade between your company and a customer (another entity), outstanding debts will not be covered.

Credit insurance has many benefits:

Protection against bad debt

Identifies potential losses

You can access key credit risk analysis by insurers on your client, their industry, and political risk to gain invaluable insight that will help you avoid losses.

Transfers the risk to the insurer’s balance sheets

Credit insurance eliminates credit risk from your balance sheets, which increases your margins and boosts your P&L.

Reduces bad debt provision

You can use excess bad debt provision to provide working capital once you have covered potential losses.

Increases working capital

Allows you to access finance

Credit insurance can improve your credit score and allow you to access more affordable finance.

Balance sheet engineering

To free up working capital, you can use the debtor asset in your balance sheet by factoring or discounting invoices.

Affordable security measure

Credit insurance is a cost-effective alternative to expensive letters of credit and bank guarantees.

Embeds credit management disciplines

Allows companies to extend credit terms

Your shipments will be covered so you no longer have to worry about “not getting paid”. This gives you an advantage in the market by allowing customers extended payment terms.

Enhances credit management processes

Credit insurance policies include disciplines that support sound credit management and best practices. They also reinforce and enhance your existing procedures.

Credit risk analysis and expertise

You can get support for setting credit limits and managing recoveries.

Enables business growth

Promoting sales growth while maintaining control

Credit insurance, which enhances credit management, allows you to extend payment terms to customers in both existing and developing markets.

Supports sales in higher margin markets

To support sales of high-level margin markets or specific accounts, top or key account coverage is available.

Supports mergers

Credit insurance protects investees against bad debts from merged or acquired customer portfolios.