How Trade Credit Insurance Protects a Company’s Assets, Unlocks New Markets

Trade credit insurance protects businesses from the financial risk of selling goods or services on credit. The policy ensures that a business will be compensated if its customers cannot pay for products or services within the agreed-upon credit terms. This coverage can be critical in mitigating risks, especially when businesses extend credit to new or international customers.

How Trade Credit Insurance Works

When a company sells on terms—whether 30, 60, or even 120 days—the seller is exposed to non-payment risk during this period. Trade credit insurance acts as a safety net by covering the buyers’ creditworthiness. Essentially, the insured party is the seller, while the insured “asset” is the buyer’s ability to pay its invoices. If a buyer defaults due to insolvency or slow/nonpayment, the insurance carrier compensates the seller, typically up to 90% of the invoiced amount.

Who Should Businesses Consider Purchasing Trade Credit Insurance?

While trade credit insurance applies to businesses of various sizes, it’s most commonly used by companies with substantial sales volumes or those operating in international markets. Companies generating more than $10 million in annual sales are often good candidates for this coverage. The policy becomes especially valuable for:

• Large companies with significant sales volume (typically over $100 million annually)
• Mid-sized firms with sales ranging between $28 million and $100 million, especially those with foreign receivables
• Businesses with high customer concentration, where a significant portion of sales comes from one or a few buyers

In scenarios where 50% to 60% of a company’s revenue is tied to a single customer, non-payment risks pose a significant threat. Trade credit insurance provides peace of mind by ensuring the business against potential losses from such concentrated exposure.

The Underwriting Process: What to Expect

Underwriting for trade credit insurance involves assessing the financial health of a company’s customers. Businesses provide a list of customers they wish to insure and the credit limits they seek for each one. The insurer then reviews these customers, offering coverage limits based on their risk assessments. For instance, they may approve a $1 million limit for a major corporation but offer only $50,000 for a smaller company. Once the buyer is approved and the policy is in place, the seller can safely extend credit to that customer, knowing that receivables are covered up to the insured limit. However, if a business exceeds the approved credit limit, it is self-insuring for the overage.

Not a One-Size-Fits-All Policy

Trade credit insurance is not a blanket policy but, rather, buyer-specific coverage. Each customer has an individual credit limit, and the premium is calculated based on that limit. For example, a business could have a policy covering 200 different customers with distinct limits, yet the overall policy may have a maximum liability cap—say, $10 million. This means the total amount payable by the insurer across all claims cannot exceed that cap.

In catastrophic events where multiple customers fail to pay simultaneously, the policy ensures coverage up to the total liability limit. However, only a few claims are typically expected to occur at any given time.

Cost Considerations

Trade credit insurance is generally considered affordable, though pricing can vary based on several factors:

• Volume of sales: Higher sales volumes usually lead to
  lower rates.
• Terms of sale: Shorter payment terms (e.g., 7-10 days) tend to result in lower rates.
• Industry and geography: Riskier industries or companies exporting to volatile regions often face higher premiums.

Policies are written on annual basis.

Triggers for Claim Payout

A trade credit insurance policy can be triggered in two
primary ways:

• Bankruptcy: Once a customer files for bankruptcy and the court recognizes it, the insurer will pay out 90% of the outstanding receivable.
• Protracted default: If a customer fails to pay after the agreed-upon terms (e.g., 30 days) and the seller has exhausted collection efforts, the insurer will step in. After 60 days of non-payment, the insurer attempts to collect; if unsuccessful, it compensates the seller for 90% of the outstanding debt.

In either scenario, if the insurance carrier is able to recover any funds, the proceeds are shared between the insured and the insurer on a 90-10 basis until the seller is fully compensated.

Expand into New Markets: Protecting the Top and Bottom Line

One of the key benefits of trade credit insurance is its ability to help companies expand into new markets without the fear of non-payment. Businesses can confidently enter new regions or industries by ensuring receivables from unknown or foreign buyers. For instance, a regional company primarily operated in the Southeast U.S. could start selling in California or even exporting to international markets, knowing that their receivables are insured.

In this way, trade credit insurance protects both the top line (enabling sales growth in new markets) and the bottom line (safeguarding against losses due to customer non-payment).

A Strategic Investment for Growing Businesses

While trade credit insurance may not yet be a standard practice for all companies, it offers significant value for businesses looking to manage risk, particularly when extending credit to new or international customers. For companies with high sales volumes or exposure to concentrated customer bases, this policy can be a crucial tool for protecting receivables and fostering growth. Whether navigating domestic markets or expanding globally, trade credit insurance provides a financial safety net that is difficult to overlook in uncertain economic times.