Assessing the Cost of Trade Credit: Balancing Insurance and Bad Debt Losses

Trade credit insurance is a type of insurance that can help protect businesses from bad debts stemming from customers defaulting on their payments. The cost of trade credit insurance can vary depending on several factors, such as industry, trading volume, creditworthiness of the customers, bad debt history, and amount of coverage desired. Beyond just insuring against losses, trade credit insurance acts as a Default Protection mechanism. This means businesses can operate with the confidence that, in the event of customer insolvency or protracted default, they have a layer of defense to maintain their financial stability.

A bad debt loss refers to the financial losses that a business incurs when a customer fails to pay for the goods or services that have been provided and delivered on the agreed due date. These losses can be significant and could impose huge impacts on a company’s bottom line, especially for SMEs. A business will have to generate additional sales (about five extra invoices on average) to cover a single loss. This will also be detrimental to a company’s profit margins. 

When considering the costs of trade credit insurance versus the potential loss from bad debt, it is important to take into account the likelihood of a customer defaulting on their payments. If a business operates in an industry with a high risk of bad debts, the cost of trade credit insurance may be well worth it to protect against potential losses in terms of Return on Investment (ROI). 

On the other hand, for businesses with a lower risk of facing bad debts, trade credit insurance can give them peace of mind and act as a credit management tool to support their business growth. More importantly, liquidity is crucial for business survival. Aside from cash flow protection, businesses can use credit insurance policies as collateral to access funding with better terms from local banks. 

One of the prime benefits of opting for trade credit insurance is Credit Risk Mitigation. By ensuring that potential non-payments are covered, businesses can confidently expand their credit terms, fostering trust and building stronger relationships with clients without added financial strain.

In order to make an informed decision about trade credit insurance (TCI), companies can use our online credit insurance premium calculator to determine the indicative cost of the coverage and compare it to the potential loss from bad debts. 

Overall, trade credit insurance should be viewed as a good investment. A trade credit insurance policy can help mitigate account receivable risks while supporting your business to win additional orders and expand to new customers or even to new / emerging markets. It is also welcomed by banks, which can help your business to gain financing with a trade credit insurance policy in place.