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How do companies use trade credit insurance?

The impact of unpaid debt on any company, large or small, can be damaging. So it is important to protect yourself from it as much as possible.

How do you do that?

One way is with trade credit insurance.

What is Trade Credit Insurance?

Most businesses offer credit to their customers, often in the form of the goods or services they deliver before payment is received. Trade credit insurance is a form of insurance that protects businesses from the non-payment risk associated with this type of commercial credit.

Credit insurance usually covers an agreed percentage of the credit advanced to customers, and will guarantee to reimburse a business in cases of customer payment default that are not related to commercial disputes over quality of the goods or services delivered.

Having credit insurance in place supports businesses in minimizing financial risks, lowering short-term financing costs and improving profitability through better credit management.

How does it work?

So, we now understand exactly “what” trade credit insurance is, but how does it work?

Credit Insurance premiums and insurance limits are usually set by the insurer on a customer by customer basis, and take into account a number of factors, such as: customer credit rating and customer past payment history.

These limits will be continually monitored by your trade credit insurer in the light of regular credit information they receive on your customers.

In order to be able to make a claim against your credit insurance, in the event that an insured customer does not pay for goods or services you have delivered, you will be obliged to notify your insurer within a specified period and take action (possibly in concert with the insurer) to recover the outstanding money.

Assuming proper notification, credit insurers will typically settle valid claims six months after the original due date of the payment.

How do companies like mine use trade credit insurance?

There isn’t one good reason to use trade credit insurance. There are several!

For many companies, the decision to take out trade credit insurance is often based on many different factors.

Here, we’re going to take a look at three of the top ways companies use trade credit insurance:

1. To Enhance Relationships
In business, it is important to build strong, long-lasting relationships with your customers. Trade credit insurance can help you do this by giving you the confidence to offer credit to your customers, allowing you to build trust and, in turn, enhance your relationships. After all, the more commercial credit you offer, along with better payment terms, the more attractive your products become to potential customers.

2. To Protect against Insolvency
When customers don’t pay, it can be a frustrating and worrying time for your business; but when customers can’t pay, you can face the prospect of serious financial loss. With trade credit insurance, you can protect yourself against customer insolvency.

3. To Support Expansion
Expansion is a key component of any long-lasting and successful business. Every second that your cash is tied up in late payments, and your employees are wasting time chasing unpaid accounts, your ability to grow is compromised.

With trade credit insurance, you have greater assurance of income, supporting business planning, and can avoid futile efforts to collect long overdue accounts..

You can also “collateralize” your receivables. With trade credit insurance in place, companies are generally able to raise money against their receivables from their bank or another financial institution.

Why?

After discussing the “what” and the “how”, it only makes sense for us to take a quick look at “why”.

As mentioned above, trade credit insurance offers companies the ability to collateralize their receivables. Should companies do this, they can use the borrowed capital to help fund day-to-day expenses, make smart investments and thereby increase profits.

Another main reason companies choose to use trade credit insurance is that trade receivables can represent up to a third of the total assets on a company’s balance sheet — so it is important to be protected!

According to the Association of British Insurers:

In 2015, almost £150m in total was paid in trade credit insurance claims across all businesses, an increase of 41% on the previous year. £36m of that was paid out to small businesses.

These figures highlight the value of trade credit insurance to businesses, particularly small businesses in which the cash flow difficulties caused by unpaid accounts can be devastating.

Final Thoughts

If you don’t have trade credit insurance, you leave your company open to many financial risks — risks that could potentially harm your business beyond repair. To have trade credit insurance is to have peace of mind.

Businesses use trade credit insurance for many different reasons. If one reason for you is the opportunity to finance your receivables, please contact Gii. We’d be happy to explore how we can assist you.