Trade credit insurance protects policyholders from losses due to buyer default. It also attracts investors, expands customer base, and lowers bad debt reserves. Though it can be costly, it offers peace of mind and financial protection.
Trade credit insurance is a type of trade insurance coverage that helps protect the policyholder from losses incurred when a buyer defaults on purchased items. Assuming the buyer does not dispute the validity of the purchases or charges, the insurance coverage offsets at least a portion of the unpaid amount that will be settled. Typically, the trade credit insurance provider covers the customer’s loss and initiates the collection process against the defaulting buyer.
Securing business credit insurance is important to the financial well-being of virtually any type of business. In addition to the obvious benefit of being protected against the potential for lost revenue due to non-payment of outstanding customer invoices, the presence of trade credit insurance sends a clear signal to potential investors that the company is well organized and sound. From this perspective, trade credit insurance not only helps to reduce the payment risk but also creates a more positive image of the company which helps the company to attract investors and increase the cash flow in the operation.
With the protection offered by trade credit insurance, the policyholder also enjoys a number of other benefits. The company is free to extend credit to more customers, a move that often attracts additional business that helps expand the customer base over time. Often, the business is positioned to offer credit terms that compare favorably with terms offered by banks and finance companies, an advantage that is likely to attract potential customers. Trade credit insurance also enables the insured company to maintain lower bad debt reserves, which means that the income received can be diverted to other areas of the operation, including the settlement of any outstanding debt that the company may currently have.
As with most types of business-related insurance coverage, business credit insurance isn’t cheap; maintaining coverage can be a significant sum for each year the business is in operation. Depending on the terms of the policy, premiums may be due monthly, quarterly or even annually. For companies that offer high-priced items to customers on credit, insurance coverage offers great peace of mind and protects the business from a possible loss that could financially harm the operation. For this reason, even if only a few lawsuits are filed over many years, the cost of trade credit insurance is easily offset.
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