Trade credit risk management Plus Trade Credit Finance & Trade credit Insurance

What is Trade credit management?

credit risk (default and dilution risk) requires the implementation of a credit risk management system that exploits the broad knowledge developed by financing supply relationshipsr

What is Trade Credit Finance ?

For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit.

What is Trade credit Insurance?

Trade credit insurance protects manufacturers, traders and service providers against losses from non-payment of a commercial trade debt. If a buyer does not pay (often due to bankruptcy or insolvency) or pays very late, the trade credit insurance policy will pay out a percentage of the outstanding debt.

Accounts receivables typically represent more than 40% of a company’s assets, but one in 10 invoices become delinquent. Trade credit insurance can prevent bankruptcies, help companies manage credit, and even present opportunities for business expansion in the increasingly connected global marketplace.

What risks does trade credit insurance cover?

The primary function of trade credit insurance is to protect sellers against buyers that do not or cannot pay. It insures against a buyer that has declared bankruptcy, insolvency or a similar legal status, as well as protecting insureds against buyers who delay payments under a bankruptcy protection arrangement.

The International Credit Insurance & Surety Association explains: “If a buyer does not pay, the trade credit insurance policy will pay out a percentage of the outstanding debt. This percentage usually ranges from 75% to 95% of the invoice amount, but may be higher or lower depending on the type of cover that was purchased.

“Trade credit insurance policies are flexible and allow the policyholder to cover the entire portfolio or just the key accounts against corporate insolvency, bankruptcy and bad debts. The most common type of cover is so-called Whole Turnover Cover, which covers all buyers of the policy holder.”

What’s not covered by a trade credit insurance policy?

The risk being transferred has to connect directly to an underlying trade transaction. If no direct trade link exists, outstanding debts cannot be covered by a trade credit insurance policy.

What are the alternatives to trade credit insurance?

The main alternative to trade credit insurance is self-insurance, a practice particularly popular in the US where trade credit insurance take-up is lower than 5%. Businesses that choose to self-insure can put a reserve on their balance sheet to cover any bad debt that may incur over a financial year.

When should companies purchase trade credit insurance?

Firms tend to turn to trade credit insurance when they have a credit problem or foresee exposure in the near future – but that’s often too late for insurers to take on the risk. North America chief economist Yue Ma commented: “Trade credit insurance can help companies apply longer term risk management strategies. We would advise firms to consider trade credit insurance when business is good, so that when a problem does strike, they don’t find themselves trying to get coverage for an uninsurable risk.”