Thank goodness for trade credit insurance

The cost of a ‘bad debt’ should be treated much more than simply the loss of money owed. The truth is, one can never make up for the cost of a bad debt. The impact can put stress on cash flow and will damage a company’s bottom line. What would be the consequences of one of your largest customers failing to pay?

The value of the debtors’ ledger (money owed) is one of the largest assets of a business and yet it is often not insured. Other business assets are normally insured, yet the risk to a business of customer insolvency is one of the most volatile exposures.

Why get trade credit insurance?

  1. Preserve profit – Too often and too late businesses realise that a bad debt is really lost net profit; a bad debt reserve is not the answer. It won’t put cash back in your hands.
  2. Protect liquidity and cash flow – The proceeds of a credit insurance claim inject liquid funds back into a business.
  3. Confidence to expand – Allow growth, knowing that the cost of potential failures has been covered. Hold a competitive advantage whilst others operate with uncertainty.
  4. Strengthen credit management – Firm credit limit decisions are provided on the larger debtors of the business, based on sound analysis and information.
  5. Add security – Insuring your debtors ledger often provides a new source of security to offer banks.

What risks are covered by a credit insurance policy?

Commercial Risk Cover

  • Customer insolvency
  • Protracted default

Export and Political Risk Cover

  • Contract frustration (due to war, civil war, riots or commotions)
  • Inconvertibility of currency (inability to pay in the invoiced currency)
  • Cancellation of import or export licences
  • Contract cancellation (resulting from action by the Government of the buyer’s country)
  • Contract repudiation (customer’s failure to accept goods despatched)

How much does it cost?

Premium rates vary and depend on factors such as the type of policy chosen, the level of turnover insured, the level of deductibles, the credit terms extended, the spread of buyer and/or country risks, the quality of debtors and claims history. The cost is low, usually between 0.10% – 0.35% of a company’s insured annual sales turnover. Premiums are tax deductible and can also be paid monthly, quarterly, or annually.

For more information on how we can help you, contact us at [email protected].


*Source: Cobranded flyer from NCI Trade Credit Solutions, Westcourt General, Steadfast