Trade credit insurance has many benefits
All types of businesses can benefit from credit insurance policies, regardless of whether they trade nationally or internationally. They are also suitable for many sectors, including manufacturing and services. The benefits are available to all sizes, from micro-SMEs to large multinationals.
Although protection against nonpayment is the primary reason for purchasing credit insurance, there are many other benefits that businesses can enjoy by taking out credit insurance.
Expanding sales
Trade credit insurance allows businesses to sell more to customers and expand to new customers.
Expanding into new markets
Trade credit insurance protects businesses from the risks of exporting abroad and reduces uncertainty.
Get better financing terms
Businesses with trade credit insurance will usually get more capital from banks.
In-depth market knowledge
Trade credit insurance provide businesses with extensive knowledge about industries, companies, and economic trends that could help them grow.
Reduce bad-debt reserve
Trade credit insurance allows the company to free up capital that can be used elsewhere. Credit insurance premiums can be tax-deductible. This is in contrast to bad-debt reserve, where companies simply set aside money if a debt cannot be recovered.
Protection against non-payment
Trade credit insurance pays a percentage of any outstanding debts if a customer is unable to pay them due to insolvency, protracted default, or other reasons. Typically around 90%.
The SME
This SME creates bespoke metal products for construction projects. It can take more than a year to get an order placed with them. This SME had to deal with a few instances of non-payment and took out a credit insurance plan to protect themselves from future problems and to ensure that they can continue meeting their obligations to suppliers, distributors, and factories on time.
The SME could purchase directly from the credit insurer and obtain a comprehensive credit policy with credit limits based upon the most recent information about their customer’s finances; indemnity for customer debts not paid, and collection of past due payments.
SME had also access to the online policy management tool of the insurer that allowed them to request policy limits almost immediately. This allows them to quickly decide if a potential customer is a suitable risk and reduces their administrative burden.
These case studies show the real-world benefits of trade credit insurance.
The construction company
Unexpectedly, a customer of a construction firm went bankrupt. Their cash flow was protected by the prompt payment of their claim.
The sudden collapse of a large customer with such a significant debt could have serious consequences for this medium-sized business. Poor financial performance wasn’t the reason for this failure, unlike many others. The insolvency caught the entire sector off guard and meant that there was no time to reduce credit exposure.
The company had, however, insured its trade receivables through credit insurance, and they immediately contacted the broker and credit manager of the policyholder to make sure that the claim was paid quickly. The claim was submitted within 4 weeks and the payment was made in full. This helped to prevent any negative impact on the company’s cash flow.
Multinational companies
The multinational company operating around the clock, with a presence in nearly 100 countries and a direct presence of over 30 others, this multinational manufacturer appreciates its credit insurance policy. However, they also value the information that their insurer can give them about companies in other parts of the globe with which they are interested in doing business.
Their relationship with their credit insurance allows them to request a credit limit for a customer. If the insurer agrees, the limit can then be agreed upon quickly. If they don’t agree, the firm will know that more work is required and may require more information to get the credit limit approved.
This multinational company can have a credit insurance policy to protect itself from unnecessary risks. They also work with their insurer, who has visited their larger subsidiaries to get a better understanding of how they operate. They work through their broker the majority of the time but can still have direct access to the credit insurance company if they so desire.