Invoice Bazaar Blog

How does trade credit insurance work?

By Invoice Bazaar | July 21, 2022

Trade credit insurance protects businesses against financial risks and losses that accrue because of extending credit to customers and the eventuality of non-payment. The insurance company pays out to the beneficiary or the insured entity according to the policy purchased by the proposer when the latter’s customer does not or cannot pay or becomes insolvent. In most cases, the insurer also covers the cost of legal action if the policyholder needs to take the customer to the Court of Law. Thus, trade credit insurance policies enable businesses to manage their cash flows more effectively by protecting them when there is a non-payment of commercial trade debt. 

It can also help companies to grow by empowering them to increase their business by offering more favorable deals to their customers and giving them the strength to weather difficult economic times by providing a safety net against bad debts. Organizations covered by trade credit insurance can continue with their business transactions even when their customers face financial difficulties, as they are covered for the loss of invoice value and any interest on it. Trade credit insurance can be availed by businesses of all sizes and offers coverage against domestic and international receivables. However, as a business owner, you may face specific challenges when choosing a trade credit insurance policy. 

At the outset, you will have to research and compare different policies to find out the best one for your company. Moreover, you may need to decide how much coverage you need and ensure the policy covers all your potential risks. Finally, it would be best if you worked with your insurer to confirm that the claims process is smooth in case you have to make a claim. For MSMEs, the most crucial factor may involve proving their financial stability to the insurer while buying a trade credit insurance policy. Other factors that the insurer will consider may include the firm’s customer base and their credit worthiness, credit history, and payment terms. 

A mistake generally committed by small business owners while buying a credit insurance policy is not reading and understanding it correctly. As trade credit insurance policies can be flexible and complex, it is essential to make sure you know all the details before purchasing one. Also, you should confirm that your firm is adequately insured because this type of insurance policy may either cover the entire portfolio or just a percentage of your receivables. As such, while buying a policy, you need to be confident that you have enough coverage to protect your business in case of non-payment, bankruptcy, insolvency, or bad debts.