Trade Credit INSURANCE
Trade Credit Insurance also known as Credit insurance is a risk management tool that covers the payment risk resulting from the delivery of goods or services. Under this policy credit insurer usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of insolvency, bankruptcy or protracted default. For e.g. An Indian tiles manufacturer sells tiles on credit to International Clients. It seeks protection against payment delays and non-payment by its buyers. A “Whole turnover” trade credit insurance policy, which covers all of the toy manufacturer’s buyers, the “good, the bad”, is the solution . In exchange for a premium, which is based on the annual turnover and credit risk of its buyers, the tiles manufacturer receives protection up to an agreed percentage of any losses incurred against late payment or the failure to pay by its buyers.
The policy has been designed to cover insured against the commercial risks of their buyer’s default . Under this policy Insurance Company will cover the portfolio of buyers and pay an agreed percentage of an invoice or receivable that remains unpaid as a result of covered causes of loss. The causes of loss covered under this policy are:
Insolvency - protect your business against the risk of non-payment if a buyer becomes insolvent.
Protracted Default – when buyer fails to pay the receivable within a pre-defined period calculated from the due date of payment of the receivable.
Political Risks - In case of exports cover, the Insured also has an option to cover Political Risks which covers non- payment due to:
- Transfer Restriction / Inconvertibility
- Import/ Export Restriction
- Natural Disaster
- License Cancellation
BENIFITS OF TRADE CREDIT INSURANCE
- Protects the company’s P&L and Balance Sheet against bad debt
- Potentially reduce and quantify bad debt provisions
- Better borrowing and financing options
- Increase profitability
- Grow sales with confidence
- Prevent losses before they occur
- Maintain cash flow, profitability and protect budgets and business plans
- Information, screening of clients
- Improve credit decisions
- Protects investors and stakeholders