What Is Trade Credit Insurance?

Trade credit insurance protects your business against losses due to the insolvency or default of account customers in both Australia and overseas. Trade credit insurance can provide protection against:

• Insolvency
• Default
• Political risks

Trade credit insurance can be used as a risk management tool to protect your business. For example, your business may suffer a number of ‘smaller’ bad debts from account customers which can usually be managed without causing a considerable amount of harm to your bottom line. The real risk lies in the large and unexpected losses arising from the failure of significant debtors which can be devastating to your business.

You may believe you know your clients and can judge those who might default on payment therefore avoiding bad debts. However consider this, last month, in the UK, a construction company giant, Carillion, one of the largest government contractors went bust due to over-borrowing and losses on projects. Across the world they had 43,000 employees and had 30,000 sub-contractors, many who will go to the wall according to media reports. Given the size of the company and the government connections many suppliers would have considered doing business with Carillion to be extremely safe.

Warren Buffett, one of the world’s most successful investors, has the following nugget of wisdom, “You only find out who is swimming naked when the tide goes out.” In other words you cannot tell who is over-leveraged or struggling until they are under stress.

As a company how can you avoid exposing your company to bad debtors? A trade credit insurance policy will ensure that your business will continue to successfully operate despite the failure of payment from your debtors.

What Are The Benefits of Trade Credit Insurance?

1. Reduce risk of loss

Trade credit insurance provides a safety net against non-payment of invoices. One of the largest, as well as the most at-risk of all your assets is the money you are owed.

2. Improve market penetration/sales growth

Credit insurance allows you to expand your business without any hassles. You can enhance the credit lines with your existing customers or offer more competitive terms of credit to the new buyers (open account terms).

3. Increase access to working capital finance

If you have trade credit insurance this adds value to your business. Why is this so?

• If you are looking to sell your business in the future having trade credit insurance can improve the value of your book as it is viewed as secured.
• If you would like to grow your business through further borrowing banks will look at larger amounts of lending to you if you have trade credit insurance, because the risk of their loan not being repaid is reduced.

4. Manage credit risk

The insurer providing credit coverage often acts as a partner and helps to avoid credit losses. They also provide market intelligence which includes better insight into the financial viability of the buyers.

5. Lower bad debt reserve

Trade credit insurance allows you to reduce your business’ bad debt reserve. It also helps to manage write-offs with more certainty. This in turn helps to improve earnings and profit. Premiums paid for credit insurance coverage are tax deductible.

6. Avoid unexpected impacts on your business

The unexpected insolvency of one of your major customers could have a significant impact upon your business operations. Having a trade credit insurance policy can assist in identifying early warning signs of potential payment difficulties.

Trade Credit insurance therefore allows you to run your business with confidence and reduced risk. It also supports business expansion as you will be in position to serve more customers due to the competitive credit terms that you can now extend with enhanced working capital, increased borrowing power and better credit management.