Many businesses, particularly in shipping, trade, and manufacturing, produce and sell goods or services to their customers without getting paid — initially. Trusting that they will get paid in a timely manner even after giving up their goods requires a leap of faith and is a cornerstone of building successful business relationships. But what happens to your business if your customer can’t pay? Perhaps it goes out of business right after receiving your largest shipment yet?
Trade credit insurance is designed to help businesses in this situation and offers a safety net to businesses that operate this way. While it’s normal to offer up your goods or services before receiving payment, if you don’t get paid at all then this can create a huge financial burden on your business. If your business needs trade credit insurance, speak with a local and trusted independent insurance agent today to find out more about this critical insurance.
What Is Trade Credit Insurance?
Trade credit insurance, sometimes simply referred to as credit insurance, offers businesses insurance coverage for money owed to them by other businesses for goods or services already rendered.
Trade credit is deferring payment for goods or services for a certain amount of time, which gives the customer enough time to repurpose or sell those goods to another business. Once they sell or pass those goods on, they can pay the first business the original amount that they owe.
The supplying business is basically operating with uncertainty and in the trust that their customer will pay them eventually. The business continues to operate, and perhaps operate in debt, in the belief that they will be paid for the goods or services that they already sold.
Trade credit insurance protects this business in the event that they are never paid. Perhaps the customer went out of business before they could pay their bill, or declared bankruptcy after receiving the order from your business.
If your business doesn’t receive payment from your customer, it could affect your business’ survival. Trade credit insurance guarantees that your business will receive some type of payment for those goods no matter what happens to your actual customer. It allows a negative debt entry to be turned into a positive profit entry and is often used as collateral when seeking additional funding.
How Does Trade Credit Insurance Work?
Trade credit insurance typically pays between 75% and 95% of the invoiced amount, though you’ll be able to choose the amount that you want to insure for. You’ll also be able to choose which customers you’d like to place insurance on.
Policies can vary on what they actually cover, but most trade credit insurance policies will cover nonpayments if your customer goes out of business, files for bankruptcy, changes ownership and doesn’t pay, become insolvent, or even can’t pay due to political turmoil and geopolitical uncertainty.
It can only apply to customers that your business has a direct trade link with, meaning you won’t be able to apply this coverage to an indirect transaction. It has to be a direct business dealing that the insurance company knows about and has approved ahead of time.
When you first buy your policy, you’ll likely need to submit a list of all of your trade credit partners and customers. Once you decide on which customers you’d like to insure, you’ll also need to submit to the insurance company what their payment history is.
After you buy your policy, you’ll want to stay on top of it as your business evolves. You can add or remove customers as needed to your policy and will need to work with your insurer to provide a clear, transparent picture of what your business is doing, who it’s dealing with, and what amounts you want to insure for.
Things to Consider with Trade Credit Insurance
The cost of a trade credit policy will depend on various factors, including your carriers rates for trade credit insurance. As a rule of thumb, you could plan to budget at least 1% of your trade credit income for an insurance policy. Some of the rating factors include things such as:
- The industry your business is in
- How many clients you’re insuring against
- Your limits of insurance
- Your customers’ payment history
- Your time and monetary deductibles
In order to determine how much coverage you need, you’ll likely want to sit down with your independent insurance agent to discuss your business’ exposure. You’ll want to factor in how much money you can reasonably lose without putting your business at risk, and insure your largest clients for at least the minimum amount you’d need to stay afloat.
You can tailor your policy to reflect the nature of your business. If you just have one very large client, you might want to only insure that one customer for a higher percentage of what they owe you, perhaps as high as 100% and without a long waiting period.
If your risk is spread out over a few clients, you can probably afford to carry a lower percentage of coverage because all of your customers aren’t likely to go out of business at the same time.
Your insurance company will also work with you on new and existing clients to make sure the credit insurance limits accurately reflect the customers’ current credit and payment history, because the insurer won’t want to take too much risk on untrustworthy clients.
The Benefits of Trade Credit Insurance
Trade credit insurance can be very beneficial for many types of businesses, but may be especially valuable for businesses with international customers as well as businesses operating in the import/export industry.
Some of the benefits of trade credit insurance include:
- Predictable cash flow. By insuring some or all of your trading partners’ payments, you are guaranteeing that you will receive that money, whether it’s from your customer or your insurance company. This predictable cash flow can allow you to better plan the growth of your business.
- New market opportunities. Having the ability to buy insurance on new clients can open up access to riskier markets that you might otherwise hesitate to sell to. Bear in mind though that your insurance company will only tolerate a certain level of risk from the customer, but it can still make your own business’ expansion less risky.
- Reduce bad debt exposure. Knowing that your business won’t have to suffer from unpaid accounts means that you won’t have to set aside as much money in a rainy day fund. Your business can have a more positive cash flow and use that cash to expand into new markets.
- Access to increased capital. Lenders value security, which means that they value insurance. Proving to lenders that you have trade credit insurance on your largest customers makes them more likely to invest in your business, since their money is protected.
While trade credit insurance isn’t necessarily for every business out there, it can be invaluable for the growth and success of businesses that operate in a deficit by fronting goods or services to customers.
The Best Way to Find Trade Credit Insurance
Buying trade credit insurance can be a complicated process, which means you’ll want to have a trusted and knowledgeable advisor to help guide you through it. It can also be a very valuable tool to have in your business, which also means that you can’t afford to take shortcuts or not have the proper type of insurance.
TrustedChoice.com independent insurance agents are trusted professionals who can be your advisor in trade credit insurance. They’ll work with you to find the right insurance carrier for your business and can show you the ins and outs of what you’re covered for. They are also local, which means they can come to your office and business and will take the time to learn all about your business’ risk exposures and needs, allowing you to focus on what you do best.