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A Guide to Trade Credit Insurance

Trade credit insurance, often referred to as insurance for a company’s accounts receivables, can be a valuable investment for many businesses.  To understand how valuable trade credit insurance can be for YOUR business, we need to first understand the role of trade credit both domestically and internationally.

Almost 90% of world trade relies on some sort of trade financing, or buying/selling on credit terms.  It is also the largest use of capital for a majority of B2B sellers in the United States.  Trade credit can help a business obtain and sell goods without having to pay for them up front, thereby increasing the buyer’s cash flow and improving the buyer’s cash conversion cycle.  A great example of this is Walmart, one of the largest utilizers of trade credit.

However, with the extension of credit comes risk.  Understanding how trade credit works for your business will in turn help you understand how important it is for the companies that buy from you, and the risks involved in offering credit terms to such customers.

It is possible if you are buying your product on 7/30/60/90-day credit terms, your supplier has a Trade Credit Insurance (TCI) policy in place to mitigate the risk they take in offering you an extension of credit or terms to buy their goods.  Conversely, as you supply product to your customers, one of the best ways to mitigate this risk is through a TCI policy.  A TCI policy covers losses caused by a number of risks including buyer insolvency, protracted default or non-payment due to political risk.  In some cases, this can mean the difference between staying in business and going out of business if and when one of your buyers defaults on their credit terms.

Besides mitigating risk, there are a number of other benefits that a TCI policy offers a business:

  • Facilitates Business Growth:

A TCI policy gives you the ability to offer credit terms to customers you normally wouldn’t be comfortable offering terms to, including new clients or international markets.  Your buyers, both domestically and internationally, could possibly be inclined to purchase more goods if they were to buy on terms or if their current credit terms were improved.  The average sales growth of policyholders who maintained TCI policies in the past 10 years is estimated to be over 8%!

  • Provides Access to Valuable Data

TCI companies monitor the credit worthiness of its policyholders, thereby accumulating tremendous amounts of credit data on most companies worldwide.  This data can help policyholders evaluate the financial status of both current and prospective customers.  Having a TCI policy in place can therefore help you make better credit decisions and potentially avoid bad debt in the first place.

  • Improves Access to Financing

Lending institutions tend to be risk averse, so proving that your receivables are insured can go a long way in helping your company obtain lower interest rates or a higher credit line.  It can even be helpful in securing additional financing.  Some companies will acquire a TCI policy for the sole purpose of making their receivables more attractive to lenders.

As a credit insurance broker, our goal at Horizon West Insurance Services is just as much compensating your company in the event of a bad debt as it is to avoid bad debt in the first place.  Our partnership with Euler Hermes, owned by Fortune 500 company Allianz, is the global leader in trade credit insurance which gives our clients access not only to their AA credit rating but to their incredibly vast database of information and network of resources worldwide so that we can help you make the best credit decisions both domestically and internationally.

Feel free to reach out to us for a free Trade Credit Insurance quote or to discuss further to see if a TCI policy is the right decision for your business.