Understanding Trade Credit Insurance
Trade credit insurance acts as a safety net, shielding businesses from the fallout of customers' payment defaults or insolvencies. By providing coverage for your accounts receivable, it guarantees that you will receive payment for goods or services delivered to your customers, even if they fail to pay.
Trade credit insurance is particularly relevant in today's uncertain economic climate, where credit risks are amplified. It allows businesses to expand their customer base, establish more favourable credit terms, and ultimately, uncover growth opportunities that would be too risky otherwise.
How does Trade Credit Insurance work?
Businesses will typically tailor their insurance coverage to their budget and risk profile. For example, they may be able to cover a single client—especially if it is a large or high risk account—or a select number of clients. Some policies provide secondary coverage, which kicks in when the original policy fails to cover the entire amount of a claim.
Insurers will base a risk assessment of a business, taking into account;
- The volume of trades it conducts
- The creditworthiness of its buyers
- The industry in which it operates
- The repayment terms with which buyers have agreed
Insurance companies often provide particular credit limits to each of a client's covered trade partners based on their financial status. If the buyer fails to pay for products or services, the insurer will only cover damages up to the indemnity limit.
Essentially, trade credit insurance is a way to mitigate the financial risk for businesses instead of offering trade credit off of their own balance sheets or another facility.
Summary of the Trade Credit Insurance process:
- Your business engages a trade credit insurer
- The insurer analyses the credit worthiness of your customer
- A credit limit is assigned to the customer which determines the maximum amount of credit they are willing to cover per customer
- Your business trades goods or services with the customer
- If the customer fails to pay according to the payment terms, you will then notify the the insurer
- The insurer will conduct an investigation
- Pending the outcome of the investigation, the insurer will indemnify you for the insured amount
Benefits of Trade Credit Insurance
Mitigation of financial losses
In the event that a customer fails to pay, the insurer will reimburse the insured business for the outstanding debt, alleviating financial strain and preserving liquidity. This protection provides confidence that unrecovered debt will be minimised, enabling businesses to focus on growth strategies.
Business expansion
Having insurance coverage can alleviate concerns about extending credit to new customers, enabling businesses to expand their customer base and explore new markets more confidently. With the assurance of insurance coverage, businesses can confidently pursue new opportunities, enter into partnerships, and establish trade relationships with larger and more established organisations. This can open doors to new markets, increase market share, and drive overall business growth.
Negotiation Support
Insurers provide ongoing monitoring of your customers' financial health, offering insights into their payment behaviour and potential risks. Armed with this information, businesses will then set appropriate credit limits and terms, granting them a competitive edge while minimising exposure to non-payment.
Financing Options
Another advantage of trade credit insurance lies in its ability to enhance a company's access to financing. With insured receivables, businesses can secure favourable financing terms from banks or lenders who often view these receivables as more reliable collateral.
Disadvantages of Trade Credit Insurance
Cost
Trade credit insurance can be expensive. Premiums are calculated using a variety of parameters, including consumer creditworthiness, industrial sector, risk spread, and credit terms. These expenses can be significant, particularly for businesses with a high volume of transactions or those operating in high-risk industries.
Coverage Limits
Trade credit insurance may not typically cover all losses. Insurers frequently exclude certain risks or establish coverage limitations that may not fully reflect the insured company's exposure or expectations. There may be caps per customer or restrictions based on geographic region or political events.
Administrative Burden
Managing a trade credit insurance coverage requires administrative work. Businesses must follow the policy terms, which generally include thorough reporting on credit limits, sales, and late accounts, and they must obtain insurer approval to extend credit beyond the stated limitations.
Claim Denials
A claim may be refused for a variety of reasons, including failure to follow policy conditions or difficulties with transaction documentation. This can put businesses at risk of incurring unanticipated losses.
An alternative to Trade Credit Insurance
While trade credit insurance offers comprehensive protection against non-payment risks, it may not be the ideal solution for every B2B business. Many businesses will be concerned about the cost, coverage limits, admin burdens and the possibility of claim denials. PayLater with Kriya offers an alternative solution that provides additional benefits to Trade Credit Insurance:
The benefits of Kriya PayLater mean that businesses don’t need to rely on trade credit insurance to de-risk the credit they offer customers, while offering a superior payment experience to buyers & streamlined account management process.
Summary of PayLater Benefits:
- Receive full payment for goods and services upfront
- Offer flexible payment terms, with Kriya taking on the credit risk
- Instant credit checks & decision at the point of purchase
- Offer a slick modern buyer experience suited to both online & offline sales channels
- Easily integrate Kriya into your existing sales platforms (via API, branded checkout experience, ecommerce plugins or our intuitive merchant portal for processing offline sales)
Talk to our team today to find out more about how PayLater can transform your B2B payment strategy
