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What is Trade Credit Insurance?
Trade credit insurance (sometimes called accounts receivable insurance, debtor insurance, or export credit insurance) is cover that protects your business from bills your customers are unwilling or unable to pay.
What Reasons for Non-payment Are a Part of a Trade Credit Policy?
While the details of specific policies vary, generally most trade credit cover includes non-payment because of the following circumstances.
- Customer bankruptcy
- Political unrest
- General default
Who Should Have a Trade Credit Insurance Policy?
While your insurance professional can address your unique circumstances, it is often a wise decision for renters or lessees to get insurance cover for property and equipment. If you're unsure about your specific circumstances, contact our expert team today.
Here's An Example:
Hope leases a storefront for her day spa. While she does not own the building, she has a large amount of money invested in all of the equipment needed to serve her customers, as well as the items that make her spa stand out from the competition.Suppose a fire destroys the building. Most, if not all, of Hope’s equipment and decorative items will also be lost. If she does not have the necessary cover, Hope will experience a tremendous financial loss. The loss could be significant enough to force her to close her business permanently.However, if Hope has insurance that covers the property and equipment, she will be able to replace the things needed to operate her business.
You should consider a policy if your company provides its customers with goods or services on credit terms, whether nationally or internationally. Trade credit insurance will protect you from customers’ defaults.
As a business owner, you are aware of the risks and rewards of offering your customers credit. In some industries, credit is an essential factor in your business’ ability to compete. However, when you are offering your goods and services in good faith, you expect to be paid in full and in a timely manner. When your customers do not hold up their end of the deal, it can have disastrous consequences for you and your company, even though you are not a fault. In instances such as this, trade credit insurance can save you from ruin.
Important Facts
According to an analysis by Dunn and Bradstreet, the outlook for business credit is shaky.
- Late payments are continually increasing and impacting individual businesses’ ability to pay their creditors
- Almost 60 per cent of Australian businesses pay their bills on time, but 9.5 per cent of businesses making payments are more than 60 days overdue
- Businesses remitting late payments are, on average, 15.3 days late
- There is a pattern of larger firms paying smaller businesses late. However, big companies pay other big companies even later
Types of Trade Credit Policies and What They Cover
Type of Cover
- Single Buyer
- Comprehensive cover
- Key account
- Excess of loss
Potential Benefits
- A single buyer policy offers cover for quality credit risks.
- This policy protects your complete portfolio from defaults on the part of both foreign and domestic companies.
- Cover for businesses against defaults by their largest buyers.
- Ideal coverage for businesses with a solid credit management history seeking protection from an extraordinarily large loss across their portfolio.
Not Usually Covered in Trade Credit Policies
- Losses relating to failure to secure the appropriate import/export license
- Failure to fulfil any laws or agreed-upon contractual obligations
- Losses related to currency exchange rates, interest payments, banking costs, legal penalties, or legal costs
Case Study
A small winery exports internationally but has a long working capital cycle. Additionally, there is a high risk of non-payment. The owner has trade credit insurance. When a new customer refuses to pay for the wine shipped to them, the winery can depend on the trade credit cover to fill in the monetary gap from the default.
Safe Work Australia, Key Work Health Safety Statistics 2014
"Penalties awarded against companies and its directors or officers for work health safety breaches have increased by 43% to $22.3 million in one year. Penalties now average $62,000 per company."
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Did You Know?
Many businesses think it won't happen to them, but statistics show otherwise. In fact:
(Chubb 2016 Private Company Risk Survey)
The likelihood of a claim that could be covered by a Management Liability policy has tripled in the last five years, with 50% of notifications resulting in a claim.
Chubb 2016 Private Company Risk Survey
The most common claims are for employment practices like bullying, harassment and wrongful dismissal.
Chub, 2016 Private Company Risk Survey
Major claims by amount relate to crime - including employee fraud.
Who Should Have a Trade Credit Insurance Policy?
You should consider a policy if your company provides its customers with goods or services on credit terms, whether nationally or internationally. Trade credit insurance will protect you from customers’ defaults.
As a business owner, you are aware of the risks and rewards of offering your customers credit. In some industries, credit is an essential factor in your business’ ability to compete. However, when you are offering your goods and services in good faith, you expect to be paid in full and in a timely manner. When your customers do not hold up their end of the deal, it can have disastrous consequences for you and your company, even though you are not a fault. In instances such as this, trade credit insurance can save you from ruin.
Important Facts
According to an analysis by Dunn and Bradstreet, the outlook for business credit is shaky.
- Late payments are continually increasing and impacting individual businesses’ ability to pay their creditors
- Almost 60 per cent of Australian businesses pay their bills on time, but 9.5 per cent of businesses making payments are more than 60 days overdue
- Businesses remitting late payments are, on average, 15.3 days late
- There is a pattern of larger firms paying smaller businesses late. However, big companies pay other big companies even later
Types of Trade Credit Policies and What They Cover
Type of Cover
- Single Buyer
- Comprehensive cover
- Key account
- Excess of loss
Potential Benefits
- A single buyer policy offers cover for quality credit risks.
- This policy protects your complete portfolio from defaults on the part of both foreign and domestic companies.
- Cover for businesses against defaults by their largest buyers.
- Ideal coverage for businesses with a solid credit management history seeking protection from an extraordinarily large loss across their portfolio.
Not Usually Covered in Trade Credit Policies
- Losses relating to failure to secure the appropriate import/export license
- Failure to fulfil any laws or agreed-upon contractual obligations
- Losses related to currency exchange rates, interest payments, banking costs, legal penalties, or legal costs
Case Study
A small winery exports internationally but has a long working capital cycle. Additionally, there is a high risk of non-payment. The owner has trade credit insurance. When a new customer refuses to pay for the wine shipped to them, the winery can depend on the trade credit cover to fill in the monetary gap from the default.
