credit insurance

What Is Trade Credit Insurance?

One of the most challenging issues that businesses face, regardless of their size, is ensuring payment for their goods and services. Despite this, many are unaware of trade credit insurance and how it can assist businesses by minimising exposure and risk. 

Credit Insurance

Credit insurance protects the money due for goods and services that have already been supplied to a customer. As highlighted in the recent recession, declining sales and unforeseen circumstances can mean that even good customers with the best of intentions can struggle to meet their previously agreed payment terms. As a result, customers' cashflow problems are passed on to their creditors, which in turn means that they may also struggle to meet their payment commitments.

This acts as a cushion against the impact of defaulting customers and the bad debts that would otherwise arise when a customer is unable to meet their payment terms (or in situations where the customer goes bankrupt). Effectively any payment risk is passed on to the insurer. This means that with a trade credit insurance policy in place, a large percentage (often up to 90%) of the outstanding debt will be covered.

Credit insurance providers can also help businesses plan ahead by alerting their clients to potential risks, should a particular company become uninsurable. In some cases cover may be withdrawn but the insurer will honour the cover provided up until a given date when the insurance was withdrawn. This helps prevent a domino effect of bad debt where one company cannot pay its debts which then has a knock on effect to their suppliers, and their suppliers in turn.

Credit insurance providers can also assist businesses in decisions about who to trade with, therefore helping them to trade more securely and reducing potential trading risks.

Furthermore, businesses that have a clearly defined credit insurance policy in place are often able to benefit from more favourable finance terms and funding requests from banks.

Joanne Aaron is a corporate communications manager at Atradius.

The Atradius Group provides trade credit insurance, bonding and collections services worldwide and has a presence in 42 countries.

Its products and services aim to help reduce its customers' exposure to buyers who fail to pay for the products and services they purchase.

credit insurance

Find Best Credit Insurance

The credit insurance(popularly known as payment protection insurance), originally developed in USA, has witnessed a spectacular growth throughout the world. This is because of enormous presence of credit culture in the western economies and subsequent protection for the lenders & consumers against the unforeseen events such as death, disability and unemployment of consumers losing his ability to repay the loan.

The term is primarily associated with a specific loan or line of credit that's design to mitigate the risks of the lender. And in today's credit happy society, its very much relevant. Apart from the lender's point of view of safe-guarding their financial interests over the lending money, borrowers ought to confirm that their families are safe and won't be in a debt trap. 

 

Just imagine, you are permanently disabled and have lost your job or steady flow of income and/or any extremity has happened to your life, what would be the miseries prevail in your family? And here comes the essence of credit (protection) insurance.

Although in today's credit happy world, this type of insurance is much common, you have to make sure that you have the proper credit plan that could adequately safe-guard you. In this case, its not only you who's an insurable interest, creditor or lender has a legal insurable insurance on your life (as a borrower or debtor).

credit insurance may be of three kinds, depending on the type of credit.

Decreasing Term Coverage for close-ended installment payment system. This is normally seen in case of mortgage, automobile, consumer, educational lending where the load balance decreases with repayment at regular intervals.

Ordinary Term Coverage for single payment loan where the loan repayment practice is in a single lump sum amount (single premium credit insurance) and the outstanding amount won't decrease.

Varying Amount Insurance Coverage in open-ended nature where the credit amount varies from month to month such as credit card loan. Normally the mortgage and loan-based credit insurance are more popular than varying amount credit insurance(open-ended). Make sure that at-least your loan amount must be covered by the credit insurer as a large portion of your borrowings may remain uncovered due to certain upper limit of coverages from the credit insurance company.

The important coverages are-

1. Death: In case of borrower's death, the claim amount is paid to the creditor or lender.

2. Disability: Claim, arising out of disability, is payable as per definition or contract of insurance which is again subject to a specific waiting or elimination period.

3. Unemployment: The benefit is payable if the borrower's lost his job, may be due to termination, lay-off, strikes, labor disputes. But the majority of credit insurance plans do not cover the conditions such as retirement, resignation or illness.