Trade Credit Insurance protects manufacturers, traders and service providers against losses from non-payment of a commercial trade debt. Debts can arise as a result of a customer becoming insolvent or failing to pay within agreed terms. The Trade Credit Insurance policy will pay out a percentage of the outstanding debt. It is a form of insurance that transfers risk for businesses seeking to protect their accounts receivable against non-payment. Bad debt affects short-term cash flow and long-term profitability and the larger the debt has an immediate impact on cashflow and its true cost is greater than the debt incurred.
One way to mitigate the risk of bad debts is to plan for it, applying long-term strategies to protect short-term risks, ensuring that cash flow remains positive. Policies are flexible and allow the policyholder to cover the entire portfolio or just the key accounts. It can protect your business against both commercial and/or political risks that are beyond your control. It is for short-term accounts receivables i.e. those due within 12 months.
Key features of having the right policy in place:
- Access to New Markets - helps protect businesses against the risks of exporting overseas, reducing uncertainty
- Insolvency Protection - should a customer be unable to pay its debts due to insolvency or protracted default; trade credit insurance will pay out a percentage of the outstanding amount owed (typically around 90%)
- Cash Flow Relief - provides cash flow relief when a business’ customers become insolvent or do not pay their bills on time. Losses can be indemnified, allowing the business to maintain its cash flow
- Reduce Concentration Risk - mitigates risks for businesses whose bottom line is dependent on a select number of customers
- Accounts Receivable Support - offers businesses access to professional trade credit analysts who can share best practices with an organisation’s credit department
- Collection Services - can provide access to cost-effective collection services
- Facilitate Bank Financing - banks will typically offer more favourable lending terms to businesses that insure their accounts receivable
- Portfolio Monitoring - provides access to professional portfolio monitors who track your customers’ ability to meet their financial obligations to the insured business
If you have an existing trade credit insurance policy, Streets Banking & Finance can arrange for a complimentary review of this and can also assist and provide quotes if you are thinking of taking this out for the first time.
Finally, if you have an invoice finance facility in place, these sometimes include ‘bad debt protection’ cover. Most providers do not insist that you have it with them so we can also help with this as well as reviewing your wider invoice finance terms.
For further information please contact Martyn Shakespear, Head of Banking & Finance at mshakespear@streetsfc.com or Tina Hayes, Associate Director, Banking & Finance at thayes@streetsfc.com.
Share this article