CREDIT INSURANCE

It is designed for businesses that sell goods or services to other businesses on credit terms (e.g., invoices that are paid 30, 60, or 90 days after delivery).

Key Functions and Coverage

Trade credit insurance typically covers losses resulting from a customer’s:

1.  Insolvency or Bankruptcy: The customer legally cannot pay the debt.

2.  Protracted Default (or Late Payment): The customer fails to pay the invoice within a specified long period (e.g., 90 days past the due date).

3.  Political Risk (for exports): Non-payment due to events outside the policyholder’s or customer’s control, such as war, import/export restrictions, or currency transfer issues.

The policy will usually indemnify the business for a high percentage of the loss, typically 80% to 95% of the unpaid debt, after any excess.

How it Works

1.  Risk Assessment: The insurer assesses the creditworthiness of the policyholder’s customers and assigns a credit limit for each. This is the maximum amount the insurer will cover for trade with that specific customer.

2.  Trading: The business trades with its customers up to the agreed credit limits.

3.  Monitoring: The insurer continuously monitors the financial health of the covered customers and may adjust the credit limits, providing an “early warning system” for potential financial distress.

4.  Claim: If a covered customer fails to pay due to a covered reason (insolvency or protracted default), the business files a claim with the insurer to recover the insured portion of the loss.

Benefits for UK Businesses

Cash Flow Protection: It safeguards the company’s financial stability and cash flow against unexpected bad debts.

Confident Growth: It gives businesses the confidence to offer credit to new and existing customers, and to expand into new markets (including exports) without the full risk of non-payment.

Credit Management Insight: Insurers provide access to extensive data and expertise to help businesses make more informed credit risk decisions.

Enhanced Funding Access: Protecting accounts receivable can make a business a lower risk for lenders, potentially improving access to financing.