Trade Credit Insurance

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.

An insurance broker helping a client

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?

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.

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
POTENTIAL BENEFITS
Single Buyer
A single buyer policy offers cover for quality credit risks.
Comprehensive cover
This policy protects your complete portfolio from defaults on the part of both foreign and domestic companies.
Key account
Cover for businesses against defaults by their largest buyers.
Excess of loss
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.

Please Note:

The facts and examples used are for informational use only and do not constitute advice or replace consultation with a qualified insurance provider.