Trade credit insurance is an important tool for businesses looking to protect themselves against trade credit risk.  This type of insurance can help to mitigate the potential impacts of bad debt and insolvency, allowing businesses to expand and grow with confidence.

In this article, we will explore the meaning of trade credit, how credit insurance works, the benefits of trade credit insurance, and real-life examples of its application.

Trade Credit: advantages and disadvantages

What is the meaning of trade credit?

Trade credit refers to the practice of extending credit to another business, allowing to purchase goods or services without having to pay for them immediately.

What are the benefits and drawbacks of providing trade credit?

The importance of trade credit for businesses transactions lies in the fact that it allows companies to purchase the good or the services they need to operate without having to pay for them upfront.

Providing payment terms to customers can bring to:

  • Increased sales: by offering credit terms, it becomes easier and more convenient for customers to purchase goods or services
  • Customer loyalty: when customers are given the option to pay for good or services with credit terms, they may be more likely to return in the future
  • Enhanced understanding of customer creditworthiness: by extending trade credit to customer, a business can gain a deeper understanding of the creditworthiness of potential customers, if supported by the right tools and procedures
  • Competitive advantage: Offering payment terms can also give a business a competitive advantage over other businesses that do not offer credit, making them more attractive to customers.

Providing payment terms to customers is essential to many business transactions, but it also comes with risks: if a customer defaults on their payments, it can result in substantial financial losses.

A strong credit control procedure is essential for every company, whether large or small, and outsourcing this activity can be the most effective alternative: for example, a good trade credit insurance policy, enables companies to control their financial situation and the long-term management of their client portfolio.

Understanding how Credit Insurance works

What is a credit insurance policy?

Trade Credit Insurance is an insurance service that protects transactions between companies, which supply goods or services with deferred payments: it covers the risk of non-payment when a business offers a trade credit to a corporate customers.

Which type of risk is covered in credit insurance and how does it work?

Trade credit insurance covers business-to-business accounts receivables from commercial risks.

The credit insurance provider  monitors creditworthiness and financial stability of the policyholder's customers and assign them a credit limit, which corresponds to the amount that will be indemnified in case of non-payment.

The Credit Insurer proactively monitors customers’ buyers throughout the duration of the policy, by gathering information and matching them with economic intelligence, market trends and industry risk analysis. Throughout the life of the policy, the policyholder may request additional coverage on a specific buyer should that need arise.

The ultimate goal of a trade credit insurance policy is not to simply pay claims as they arise,

but more importantly to help policyholders avoid foreseeable losses. Credit insurance goes beyond indemnification and does not replace a company’s credit practices, but rather supplements and enhances the job of a credit professional.

If an unforeseeable loss should occur, the indemnification aspect of the trade credit insurance policy comes into play. In these cases, policyholders would  file a claim with supporting documentation, and the insurer would pay the policyholder the claim benefit.

The benefits of trade credit insurance

Companies invest in Trade Credit Insurance for a variety of reasons, including sales expansion, better financing terms, reduction in bad-debt reserves and – most of all – protection against non-payments and unexpected losses.

All the benefits of providing trade credit to customers, such as increased sales, improved customer loyalty, and enhanced understanding of customer creditworthiness, can be further amplified by implementing a credit insurance policy. By ensuring against the risk of non-payment, a company can expand their business, attract new customers, and retain existing ones, while also trading with a greater sense of security and peace of mind.

Real life examples of trade credit insurance

Real-life examples of trade credit insurance in action can be found in many different industries, countries and business environments.

Here are a few examples of how trade credit insurance might be used by different types of companies:

  1. A manufacturer that sells goods to retailers
  2. A wholesaler that sells goods to distributors
  3. An exporter that sells goods to international buyers

In conclusion, by understanding the meaning of trade credit, how credit insurance works, and the benefits it can provide, companies can make informed decisions about how to mitigate the risks they face and expand their business with confidence.

If you're a business owner or a financial professional looking to protect your business from credit risk, our advisory team will be pleased to discuss how you can achieve your goals with our solutions. As Allianz Trade, global leader in trade credit insurance, we help companies of all sizes to manage credit risk, protect their cash flow and grow their business safely.