Trade credit insurance covers business debts, not consumer debts. The withholding amount is the minimum debt that must be defaulted before coverage begins, and the insurance limit covers debts beyond that amount. This insurance can help companies extend more credit and may include collection services.
Trade credit insurance covers debts owed to one business by another business for products or services. There are typically two numbers that are important under a trade credit insurance policy: the withholding amount and the insurance limit. The withholding amount is the amount of the bad debt loss that the insured company is required to pay before the insurance coverage begins. Unpaid debt amounts beyond the retained amount are covered by the trade credit insurance policy up to the policy limit. Trade credit insurance generally does not cover unpaid debts from consumers, but only applies to business debt.
Trade credit insurance policies generally do not cover unpaid trade debts by consumers at the retail level – rather the policies only apply to business debt. For example, a manufacturing firm that contracts with a distributor on a large-scale product deal and extends a line of credit to that distributor—that is, allows that distributor to repay any debt owed under the contract— you may have that particular debt covered by your trade credit insurance policy. Conversely, a retail store that sells individual consumer products on credit will typically not have its consumer debt covered by such a policy.
The amount withheld on a trade credit insurance policy is the minimum amount of debt that can be defaulted – that is, not repaid – before the insurance coverage takes effect. All unpaid debts above this total will be covered by the insurance policy up to the limit coverage. So, taking an example of a policy that has a retention rate of $100,000 US$(USD) and a limit of $500,000(USD), all bad debt incurred up to that $100,000(USD) retention rate would be at load of the contractor. However, any amount of debt that the company’s debtors default on above that amount and up to a total of $500,000 (USD) would be covered by a trade credit insurance policy.
There are other benefits of trade credit insurance that are common within the policies. Since companies can feel confident that a certain percentage of the company’s debt is covered even in the event of a default, the company will be able to extend more credit to the companies with which it does business. This allows the company to seek out new revenue opportunities that would otherwise be too risky. Additionally, trade credit insurance companies often provide collection services for customers’ debts.
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