Trade Credit Insurance: What is it and do you need it?

Trade Credit insurance essentially provides businesses with protection if customers, who owe you money, are unable or unwilling to pay – protection from bad debts. Trade Credit insurance insures your accounts receivable (invoices) being unpaid, caused by a customer going bankrupt, defaulting or refusing to pay.

There are a number of different types of Trade Credit insurance:

• “Whole account” or “Whole Turnover”: this type of policy covers all your invoices from all your customers
• Critical or key customer cover: this covers a business for only certain specified named customers such as a key account whose default could financially threaten the business
• Single invoice, single contract: this covers single invoices against a single customer
• Export trade credit insurance: this covers non-payment by overseas customers and can be extended to insure the busines against political risk where the government causes the payment failure (such as import/export restrictions or foreign currency restrictions), government interventions and dis-honoured letters of credit.

Who needs to take out Trade Credit insurance?

It is uncompetitive to demand payment from customers up front. However, extending credit terms to customers exposes businesses and makes them vulnerable to bad debt. Trade Credit insurance protects a business’s cash flow by ensuring that you get paid even if your customer(s) go under or fail to pay. Insolvency, lack of cash, or delays in customers being paid themselves are some of the reasons why invoices aren’t paid.

Trading internationally can expose your company to many global risks and these are hard to predict and beyond your control. Very few people would have predicted at the beginning of 2020 that several airlines would fail, so insuring against the “unknown” continues to be important and more valuable now in light of the economic stresses caused by COVID-19 and forecasted insolvencies. The UK Government’s decision to create a £10 billion reinsurance programme earlier this year, as a “backstop” to help UK businesses during the pandemic, demonstrates how valuable Trade Credit insurance is to business-to-business trade. This is however a temporary Government scheme and is expected to be tapered down.

SMEs with a smaller customer base means each customer represents a relatively large risk. New companies are more likely to have more limited amount of capital which they don’t want to put at risk. 

Trade credit insurance can also help companies secure finance from lenders (and could reduce the cost of funds) as well as increasing a company’s confidence to explore trade with new countries and win new contracts by being able to offer credit terms to customers.

In addition to the protection against non-payment of goods, many Trade Credit insurers provide portfolio monitoring so that you can track your customer’s credit worthiness (ability to pay), improve your own credit management practices and provide access to debt collection services. If the debt collection service comes as a package, then, if for example, your customer has gone bankrupt the insurance company will deal with the receiver or liquidator on your behalf.

What may not be covered

Although Trade Credit insurance covers against your buyer being declared insolvent (due to receivership, administration, liquidation, winding up or a court compromise with all creditors) or bankrupt, it will not cover you for disputed invoices and may not cover you for invoice payment terms which exceed 120 days from the date of the invoice. In some instances, insurers may not cover the total amount of the trade but only a certain percentage and policies often stipulate deductibles. Standard exclusions would include foreign exchange risk currency fluctuations and might exclude claims caused by Political Risks (for example, war, invasion, expropriation, nationalisation or confiscation by order of a government) or Terrorism.