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Trade credit insurance is a tool that protects businesses against non-payment of trade debt. It covers your business-to-business accounts receivable. If you do not receive what is owed to you due to bankruptcy, insolvency or other problem with a buyer, or if payment is very late, a credit insurance policy will reimburse a percentage of unpaid debt.
Trade credit insurance works differently from other business insurance policies. It is a credit management tool that specifically helps your business prepare for bad debt scenarios. With trade credit insurance, you can reliably manage the business and political risks of trade that are beyond your control. Trade credit insurance can help you feel secure by extending more credit to your existing customers or pursuing new, larger customers who would otherwise have seemed too risky.
Trade credit solutions for businesses
Trade credit insurance is specially designed for businesses to help ease overly conservative credit policies without exposing businesses to risk. It reduces the time and costs associated with collecting and analyzing data to identify new opportunities for growth and expansion. This can reduce reliance on bad debt reserves that tie up capital and prevent companies from reinvesting in their own growth. This is how it works:
Business development and secure growth go hand in hand with good business management. Trade credit insurance helps provide a competitive advantage: it allows you to increase your market share, drive market penetration, and expand into new markets without credit problems. With credit insurance, you can:
- Develop existing customer relationships: Trade credit insurance can give you the confidence to overcome conservative credit limits for customers, effectively strengthening and growing your business relationships. Additionally, partnering with the right credit insurance provider can provide valuable insight into the financial health of customers to help you seize new growth opportunities.
- Develop your sales safely: Trade credit insurance can give you the assurance that you will get paid for what you sell, so that you can offer better terms and increase credit limits to increase sales and improve customer relationships. You can also increase your sales more aggressively by up to 20% with a key customer without worrying about the risk of concentration.
- Dive safely into new international markets: Trade credit insurance can help you gain a valuable presence in international markets. It is designed to protect your receivables from losses due to unique export risks, including political risks, economic downturns and natural disasters, by eliminating prepayment terms or letters of credit. It also provides market insight to help you make more informed growth decisions.
- Effectively improve your borrowing base: Access to increased capital through bank loans or lines of credit is an important part of effective cash flow management. Lenders look favorably upon businesses that have insured their receivables because they know their investment in your business is protected against losses caused by customer default or insolvency.
A shortfall in working capital can cause you to lose growth and new business opportunities. Many companies use their accounts receivable as a form of collateral to fund increased working capital – a strategy that is becoming more difficult due to the current financial landscape.
Trade credit insurance is an effective way to increase net working capital. It acts as a safety net to protect your business against non-payment of your accounts receivable. This frees you from maintaining bad debt reserves and helps you protect your capital, maintain your cash flow, and secure your income while providing competitive credit terms to your customers.
Trade credit insurance can also help businesses obtain working capital financing. Banks regard credit insurance insured claims as collateral and may be willing to lend up to 80% more on these insured claims.
Bad debt protection
Once a customer’s payment is deemed uncollectible, it becomes a bad debt expense that is offset by a reduction in your accounts receivable. Bad debts also complicate your business’ accounting processes and take up valuable time and resources for staff trying unsuccessfully to collect debts.
Bad debt protection is a key benefit of trade credit insurance and that is why insurance protects up to $ 600 billion in sales in the United States. It allows you to remove credit risk from your balance sheet, improve your margins and strengthen your balance sheet.
Credit service efficiency
Whether centralized or decentralized, a credit department can become more efficient when receivables are insured by a trade credit insurance policy. Trade credit insurance supports efficient credit service in these ways:
- Risk assessment: Credit insurance issuers make risk management more efficient by providing deeper insight into clients, sectors and countries, as well as active monitoring of insured clients.
- Development of the credit policy: Trade credit insurers can provide businesses with access to trade credit professionals and data that will help streamline the creation of a strong credit policy.
- Credit decision making: Trade credit insurance coverage can help justify increasing or improving credit conditions on a case-by-case basis and saving the credit department’s time.
- Bad Debt Loss Mitigation: Trade credit insurance protects you against buyers who delay payment, refuse to pay, file for bankruptcy, or become insolvent.
With Euler Hermes trade credit insurance, you will benefit from continuous monitoring of finances and payments due, increasing the efficiency of your credit department.
Harness the benefits of trade credit insurance for your organization
Trade credit is a powerful tool that can help you accelerate your business development and improve your customer relationship, with limited risk if properly controlled. To learn more about use cases, cost of coverage, insurance terms, types of trade credit insurance, and more, download our guide to trade credit insurance.
Euler Hermes, world leader in trade credit insurance and recognized specialist in the areas of surety, collection, fraud insurance, structured trade credit and political risk.