What Is Credit Insurance and How Does It Work?
Credit insurance, also known as trade credit insurance, is a business insurance product that protects companies against losses from unpaid invoices. When a customer fails to pay due to insolvency, protracted default, or political risks in export markets, your credit insurance policy covers a percentage of the outstanding debt, typically between 75 and 95 percent. The insurer assesses the creditworthiness of your customers and sets credit limits for each buyer, helping you make informed decisions about which customers to extend credit to and at what levels. Credit insurance transforms uncertain receivables into protected assets, improving your balance sheet and making it easier to secure financing from banks and other lenders.
Benefits of Credit Insurance for Your Business
The benefits of credit insurance extend far beyond simple bad debt protection. With credit insurance in place, you can confidently offer competitive payment terms to attract new customers and grow sales without increasing your risk exposure. Banks and financial institutions often offer better lending terms and higher credit facilities to businesses with insured receivables, as the risk of customer non-payment is significantly reduced. Credit insurers provide valuable market intelligence and credit monitoring services, alerting you to changes in your customers financial health before problems arise. This early warning system helps you take protective action, such as reducing credit limits or requesting advance payment, before a customer defaults.
Types of Credit Insurance Policies Available
Credit insurance is available in several forms to suit different business needs. Whole turnover policies cover all of your trade receivables against a single buyer or across your entire customer portfolio. Key account policies allow you to insure only your largest or highest-risk customers. Single buyer policies protect against non-payment from one specific customer. Export credit insurance specifically covers international trade risks including political risks such as import restrictions, currency controls, and government actions that prevent payment. Top-up policies provide additional cover above the limits set by your primary insurer. The right type of policy depends on your business size, the concentration of your customer base, and whether you trade domestically, internationally, or both.
How Credit Insurance Premiums Are Calculated
Credit insurance premiums are typically calculated as a percentage of your insurable turnover, usually ranging from 0.1 to 0.5 percent depending on several factors. The industry sector you operate in, the creditworthiness of your customer base, your country of trade, your historical bad debt experience, and the level of cover you choose all influence the premium rate. Higher-risk sectors and export markets generally attract higher premiums, while businesses with diversified, high-quality customer bases pay less. Most policies include a minimum premium regardless of actual turnover, and some insurers offer volume discounts for larger businesses. The cost of credit insurance is generally a fraction of the potential losses it protects against.
Making a Credit Insurance Claim
When a customer fails to pay an insured invoice, the claims process involves notifying your insurer within the specified timeframe, typically within 30 to 60 days of the due date. You must demonstrate that you have taken reasonable steps to collect the debt, including sending reminders and making contact attempts. The insurer will then investigate the claim, verify the debt, and if approved, pay out the insured percentage of the outstanding amount. Most claims are settled within 30 to 60 days of submission, providing your business with much-needed cash flow during what can be a difficult period. Maintaining accurate records of all transactions, communications, and collection efforts with each customer ensures smooth claim processing.