Why is Trade Credit Protection Critical?

By Gwenyth Luu, Director – Commercial Lines

Every business owner knows that they need to have insurance policies in place to cover their risks and liabilities. Some even have policies covering situations in which their supply lines or logistical capabilities become compromised, with the intent of keeping the business running. What happens, however, if your biggest customer defaults on payments and your company suddenly loses a huge chunk of revenue? That is a question that many CEOs and business owners, unfortunately, do not ask themselves until it is too late. Those that do ask that question often don’t have a good answer. So what can be done to avoid that situation?

Trade Credit Insurance exists precisely for those situations. These policies are better known to companies who do business internationally or are located outside of the United States, but such policies are becoming more and more popular here as well. Credit insurance allows companies to protect their domestic and international accounts receivable against unexpected bad debt loss due to insolvency, protracted payment (i.e., slow payment) from customers, and political risk.

These policies cover either all or the majority of your receivables, so you won’t need to get a separate policy for each customer. Claims can be filed when customers become insolvent or after a preestablished amount of time (in the event of a slow payment).

There are many advantages to trade credit insurance:

  • Safeguard one of your largest assets— protects against a devastating loss to your accounts receivables
  • Support your sales goals—expand into new and unfamiliar markets much more comfortably by extending large lines of credit than you might normally offer
  • Strengthen your credit risk management controls—credit insurance allows you to cap exposure to bad debt losses

Let’s consider a couple of scenarios which make evident the value of this type of policy:

A manufacturing company seeks to expand its sales with customers but isn’t comfortable offering higher internal credit limits. This company could turn to a Trade Credit Policy in order to cover its customers and, thus, increase credit limits, grow revenues, and deliver more profits.

A wholesale chemical and materials company secured its receivables with Trade Credit Insurance, which allowed them to provide more transparency to its lenders and, thus, gained the ability to improve their lending terms.

Utilizing economic studies and informational databases, you can determine how creditworthy your customers may be before you extend to them. That will preemptively alleviate some of your risk, allowing the policy itself to take care of anything that slips through the cracks.

With coverage in place, you can conduct business as usual with the added benefit of value credit analysis and collection services. Don’t let a client default put your company at risk. Take proactive action and find out whether your company could benefit from a trade credit policy today.