Trade credit insurance solutions have evolved to meet the demands of an increasingly complex trading environment. These developments have resulted in a growing number of specific credit insurance terms. And not only can the terms be nuanced, but their practical meaning can vary depending on where your business is conducted.
Trade credit insurance glossary
1) Invoicing period
2) Terms of payment
Also known as , this is the payment time limit specified on an invoice. In other words, the number of days a buyer can wait before paying for the goods or services after receiving the invoice: if a supplier invoice states 90 days, the buyer is approved for up to 90 days’ credit.
Payment terms can vary greatly depending on the location of the buyer and seller – but country legislation must also be taken into account. The French Loi de Modernization de l'Économie (Modernization of the Economy Act), for example, prohibits businesses from issuing invoices with payment terms of more than 60 days (there are some rare exceptions).
3) Maximum extension period (MEP)
This is the maximum due date extension allowed under a policy when granting a credit term longer than originally agreed.
It’s necessary to understand the buyer’s specific needs when defining appropriate credit terms. We examine the country where the sale is made to identify risk and payment habit and trends; the riskier the country, the shorter the extension should be. However, we can also consider the buyer’s circumstances and credit history.
4) State of default
Putting payment terms into context
Imagine I sell toys to various retail stores in France, Germany and Spain, delivering on a monthly basis. I raise an invoice at the end of each month – my invoicing period is 30 days.
To comply with country legislation, my invoice must have 60-day payment terms for buyers in France. But for Spanish and German buyers, I decide to deliver at higher volumes to save on shipping costs and therefore raise an invoice on 90-day terms of payment.
When it comes to extending payment terms, I am aware that my Spanish buyer – while they always pay – frequently pays late. As a result, I need a maximum extension period of 90 days. If this within 180 days (90 days + 90 days), I will discontinue delivery to this buyer because we have reached a state of default. If I ship new goods at this stage, I assume the risk of non-payment at my own expense.