What is general trade credit insurance?

Trade credit insurance protects businesses from failed transactions

By Alisia Goodwin

These days, many businesses are concerned about getting their accounts receivable on time. Since a downward economic shift a few years back, many businesses find it hard to receive their payments from customers. To help solve this problem, most businesses avail trade credit insurance which helps to minimize their risk.

Trade credit insurance is a type of insurance product, which can help protect any business against different bad debts. In other words, if a business is unable to get its amount receivable from customers, then insurance company pays for the financial damage. Normally, the credit insurance agreements fetch a fixed percentage of the outstanding amount from the customers. The bad debts usually occur when clients of a business become insolvent or bankrupt.

More than 90% of the businesses deal on credit basis with their clients. The main cause of bad debts is credit related transactions; however, this can't be avoided as it's a normal procedure of doing business nowadays. Most businesses deliver goods and services in advance of receiving their payment. Normally, credit terms range from one month to three months. However, due to unusual circumstances some customers fail to pay in accordance to agreed payment terms. So, it results in loss of time and money for businesses. In many cases, accounts receivable usually convert into bad debts when customers become insolvent or bankrupt.

The function of trade credit insurance is to help absorb those financial damages, which occur due to bad debts. They tend to reduce your level of risk up to some level. You can either opt to cover your entire outstanding amount or some percentage of it. It greatly depends upon your terms of contract with insurance company. Usually your paid insurance fee is inversely proportional with your level of risk. More you want to reduce the risk, greater amount of insurance fee you need to pay!

Trade credit insurance also helps businesses forecast if any customer is going to become insolvent or bankrupt in the near future. They maintain a financial database and monitor different trends in financial data, which can help to forecast various possible outcomes.

Apart from reducing risk by insurance coverage, they also help organizations make informed decisions. Sometimes, they also offer useful advice to corporations whether to stop or continue doing business with some specific client based on the latter’s credibility.

About the author: Alisia Goodwin is a freelance blogger and currently writes for IMC Newbury Australia, which is a well known trade credit insurance broker.

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