In today’s competitive business landscape, managing credit risk is paramount. Extending credit terms to customers can fuel sales growth, but it also exposes your business to the potential for non-payment. This is where Trade Credit Insurance emerges as a powerful tool in the risk mitigation arsenal of a company.
It safeguards your cash flow, the lifeblood of any business. When a customer fails to pay due to unforeseen circumstances, Trade Credit Insurance reimburses you for a significant portion of the outstanding debt. This ensures a steady flow of income, allowing you to continue operations and invest in future growth.
Trade Credit Insurance transcends mere protection, acting as a business enabler. Mitigated risk empowers you to offer competitive credit terms, a strategic advantage that attracts new clients, strengthens existing relationships, and fuels sales growth, propelling your business forward.
Many however, may not fully understand the potential of Trade Credit Insurance. This document aims to address some of the common misconceptions surrounding this valuable tool and shed light on how it can help businesses avoid catastrophic bad debts, especially in today’s challenging markets.
1. Trade Credit Insurance is only for large companies.
While large companies have more exposure, credit risk is a threat for all businesses. Smaller firms may be even more vulnerable to a single large bad debt, making protection via Trade Credit Insurance even more critical for their financial health.
2. Trade Credit Insurance is too expensive.
While premiums are priced inversely against your credit turnover, it is tailored to your risk profile, making it potentially more affordable than absorbing a large single bad debt. It should be viewed as an investment in cash flow stability.
3. My credit department already manages risk, I don’t need insurance.
Trade Credit Insurance complements your team. It covers unforeseen events traditional analysis might miss (e.g., political risks, sudden insolvency). Think of it as a safety net for unexpected losses.
4. Using Trade Credit Insurance makes me look like a risky business
Trade Credit Insurance signifies prudence, not risk. Financially savvy firms use it to mitigate bad debt and protect cash flow. It demonstrates proactive risk management, potentially enhancing your creditworthiness.
5. Trade Credit Insurance only covers bad debt from bankruptcies.
Beyond bankruptcies! Trade Credit Insurance protects against a wider range of non-payment scenarios. Protracted defaults, political risks, and even currency fluctuations can be covered, offering a more comprehensive safety net for your receivables.
It only protects against domestic customers.
Trade Credit Insurance transcends borders. Protect yourself from non-payment by foreign customers due to political risks, currency issues, or insolvency – a critical tool for international trade.
7. The insurance company recovers all my losses
Rethink total loss recovery. Trade Credit Insurance reimburses a pre-defined percentage of your receivables (up to 90%), not the entire amount. However, for finance professionals, it’s a guaranteed recovery vs. the uncertainty of a full collection on a bad debt.
8. Getting Trade Credit Insurance is a long and complicated process.
Unlike complex loan applications, Trade Credit Insurance utilizes your existing financial data for quick evaluation. Focus on core tasks while they assess risk – a faster route to receivables protection.
9. Trade Credit Insurance takes care of collecting overdue payments.
Once confirmed of an overdue, collections are on the insurance company, not you. Trade Credit Insurance reimburses losses, but collections fall to the insurer. This minimizes disruption to client relationships while ensuring you receive a defined payout. Focus on core business while they handle recoveries.
10. My bank can provide the same protection as Trade Credit Insurance.
Banks offer limited options. Trade Credit Insurance goes beyond traditional banking tools. It provides specialized coverage for non-payment scenarios (political risks, protracted defaults) and a wider risk assessment of your entire receivables portfolio, not just specific loans.
11. I only need Trade Credit Insurance if I am in a risk industry.
Bad debts hit all industries. Unexpected events (e.g., economic downturns, supplier failures) can trigger defaults. Trade Credit Insurance offers a safety net, regardless of industry, ensuring a pre-defined recovery for unpaid receivables.
12. I need a perfect credit history to qualify for Trade Credit Insurance.
Trade Credit Insurance assesses your customer base’s creditworthiness, not yours. They evaluate the risk of non-payment from your buyers, ensuring coverage aligns with your specific receivables portfolio.
13. My current insruance covers bad debts.
Trade Credit Insurance offers specialized coverage, exceeding standard business interruption or property policies. It targets bad debt from customer insolvency, not operational disruptions. It would be prudent to check with the insurance company.
14. The claims process is slow and bureaucratic.
Reputable credit insurers understand the urgency of cash flow for businesses. They prioritize efficient claims processing with clear procedures and minimal red tape. This ensures a faster resolution and minimizes disruption to your financial operations.
15. Trade Credit Insurance limits my ability to offer credit to new customers.
Trade Credit Insurance policies allow adjustments with insurer approval. As your business grows or customer profiles change, you can adapt credit terms while maintaining coverage. It’s a dynamic safety net, not a rigid constraint.
16. Trade Credit Insurance is a luxury, not a necessity.
Trade Credit Insurance bolsters credit risk management, not a discretionary expense. It safeguards profitability by mitigating bad debt losses. Trade Credit Insurance also enables you to be more competitive, offering larger credit limits against companies who are unable to.
17. There is no ROI for Trade Credit Insurance.
Trade Credit Insurance ROI exceeds premium costs by mitigating bad debt & improving credit risk assessments, saving time and administrative costs. New debtors can have an express onboarding process where credit is extended to them from day 1.
18. The insurance company will find any reason to deny my claim.
Transparent policies & pre-defined coverage terms minimize ambiguity. Trade Credit Insurance is a dynamic tool used on a daily basis in some organisations. Timely management of your policy will enforce legitimacy of your claims. A strong insurer and broker ensures fair claim settlements.
19. Trade Credit Insurance only reimburses a small portion of the losses.
Trade Credit Insurance acts as a financial safety net, not a full recovery solution. It typically covers a pre-determined percentage of bad debt up to 90%, mitigating losses, not eliminating them.
20. I have to wait for the customer to be declared bankrupt before claiming.
Trade Credit Insurance typically reimburses after a debtor’s insolvency is legally established. This minimizes moral hazard and ensures genuine bad debt. For debtors still in business and delaying or defaulting on payments, a claim can be reported and filed on the policy.
21. Trade Credit Insurance encourages bad customer service.
Trade Credit Insurance mitigates bad debt risk, not customer service practices. It incentivizes prudent credit policies, not neglecting collections.
22. It is better to self-insure against bad debts.
Self-insurance requires capital allocation and lacks credit risk expertise. Trade Credit Insurance offers efficient loss protection and risk transfer. Large catastrophic defaults are often unexpected and it takes a large hit on the business.
23. Filing a claim will damage my relationship with the customer.
Credit claim strains debtor relations, but safeguards against losses & ensures objective credit assessments.
Quote from some business owners, “debtors who defaulted on their long overdue payments have already chosen to first break this relationship.”
24. Trade Credit Insurance is just another cost that eats into my profits.
Trade Credit Insurance is a risk mitigation tool, not just a cost. It safeguards against bad debt losses, optimizing profitability. Trade Credit Insurance is also an enabler to offer credit and increase revenue and profits.
more questions?
Whilst this article provides responses to some common misconceptions about Trade Credit Insurance, navigating the intricacies of insurance policies and selecting the best insurer and optimal coverage can feel like a daunting task.
We understand that every business has unique risk profiles and credit management strategies. Our team of experienced brokers is dedicated to empowering businesses like yours to leverage Trade Credit Insurance to its full potential. We don’t just sell policies; we enable businesses by building customized solutions that deliver maximum value and a strong ROI.
By partnering with Acclaim Insurance Brokers, you gain more than just insurance. You gain a trusted advisor committed to safeguarding your business and maximizing its long-term profitability.
Contact us today and unlock the true potential of trade Credit Insurance for your business.
