Trade Credit Insurance, sometimes called Accounts Receivable Insurance, is a method by which a seller transfers their accounts receivable credit risk (failure by the buyer to pay for goods or services) to an insurance company. This type of insurance protects a seller’s unpaid invoices and, where needed, WIP against the repercussions of a buyer insolvency/bankruptcy or protracted default (slow pay).

The primary purpose of trade credit insurance is to safeguard a seller's cash flow, earnings, and accumulated retained earnings from the potential impact of buyer non-payment. In the event of a buyer's failure to pay, the seller can file a claim with the insurer, who will then step in and compensate the seller for the unpaid invoices. This helps protect the seller's financial stability and allows them to recover the funds they are owed.

Trade credit insurance covers various scenarios, including situations where the buyer becomes insolvent or bankrupt, or when there is a prolonged delay in payment. It provides financial support to sellers and helps them mitigate the risks associated with extending credit to buyers.

By transferring the credit risk to the insurance company, sellers can reduce their exposure to bad debts and protect their working capital. This insurance also gives sellers confidence in offering credit terms to customers, as they have a safety net in place to protect against potential losses.

Key Benefits of Trade Credit Insurance:

1. Incremental Gross Profit

It refers to the additional profit generated by a seller when they decide to increase the credit limit or line of a buyer, considering various factors such as risk tolerance, gross margins, credit information, balance sheet capitalization, and the potential impact of a credit loss on cash flow and earnings. Trade credit insurance coverage plays a significant role in supporting sellers' decisions to expand credit limits.

By utilizing trade credit insurance, sellers gain confidence in extending higher credit limits or lines to buyers. This insurance coverage provides protection against the risk of non-payment, including buyer insolvency, bankruptcy, or prolonged default. As a result, sellers can mitigate the potential financial losses associated with credit transactions and enhance their risk management strategies.

With trade credit insurance coverage in place, sellers have an additional layer of security that justifies increasing existing credit limits or lines. They can be more flexible in offering larger credit facilities to buyers, knowing that their potential losses are safeguarded by the insurance policy. This increased credit capacity enables sellers to seize growth opportunities, expand their customer base, and potentially increase sales and profitability.

2. Improved Borrowing Power

It refers to the increased ability of sellers to borrow external working capital from commercial bankers or lenders, supported by the presence of trade credit insurance. This insurance coverage is viewed favourably by lenders as it protects the assets being financed, namely accounts receivables and work-in-progress.

Lenders providing working capital revolvers typically support and finance inventory as well as the collective credit risk associated with a seller's receivables. The credit risk of these receivables is evaluated based on the creditworthiness of individual buyers. With trade credit insurance in place, the credit risk of covered buyers is elevated to a Standard & Poor Rating of A+.

Borrowing base certificates often govern these credit facilities, ensuring that the extension of credit aligns with eligible collateral. Trade credit insurance plays a crucial role in this context. Sellers who utilize trade credit insurance can justify the relaxation of borrowing base parameters, allowing them to access incremental working capital.

The presence of trade credit insurance provides lenders with increased confidence in the creditworthiness of the accounts receivables being financed. It acts as an additional layer of protection for the lender, as potential losses resulting from buyer non-payment are mitigated by the insurance policy. This heightened level of security enables lenders to be more flexible in providing additional working capital to sellers.

3. Global Credit Resources

It refers to the extensive credit-related capabilities and expertise available to sellers through their partnership with a global credit insurer. When venturing into new industries, geographic markets, or trading relationships, it is crucial for sellers to exercise caution when extending credit. However, acquiring the necessary information to make informed credit decisions can be challenging and time-consuming for sellers.

By partnering with a global credit insurer, sellers gain access to unparalleled credit resources. Credit insurers, with their worldwide offices, employ thousands of risk professionals and leverage external credit and collection resources on behalf of their clients.

These extensive resources can be accessed through a trade credit insurance professional and the credit insurer's web portal. They essentially become an extension of the seller, facilitating improved and expedited decision-making processes. This allows sellers to reallocate their internal resources to focus on other objectives and goal.

4. Mitigating Risk

By transferring the risk of buyer non-payment to the insurer, businesses can protect their cash flow and reduce the impact of bad debt.

Enhancing Credit Management: Trade credit insurance provides access to valuable information about buyers' creditworthiness, enabling businesses to make informed decisions regarding credit limits and sales terms.

Facilitating Financing: Having trade credit insurance in place can make it easier for businesses to obtain financing from banks and other lenders, as it provides an additional layer of security.

5. Expanding Globally

Trade credit insurance can provide the confidence necessary for businesses to expand into new markets and trade internationally. With the assurance of coverage, businesses can explore new opportunities without the fear of non-payment.

Trade credit insurance is a vital tool for businesses to manage and mitigate the risks associated with trade transactions. From assigning credit limits to ongoing monitoring, policyholders can rely on their credit insurer to support their credit management efforts. By understanding the claims process and the proactive role of the insurer, businesses can confidently protect their cash flow and grow globally.

Remember, iFactor is here to provide tailored services for your trade to grow globally. With trade credit insurance, you can navigate the complexities of international trade with peace of mind.