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  • Trade Credit Insurance

    Trade Credit Insurance

    A sale is not a sale until you get paid - Trade Credit Insurance is the first true line of defense to protect your Cash flow.

    Companies are failing, and in 2016/2017 we had some large companies go under across all industries, to name a few The Hanjin Crisis, Dick Smith, Arrium Mining and Materials, Hallmark Computers, Geelong Telephone Company, PC Range, Cullen Group Australia, Builton Corp Pty Ltd. .

    While the reasons differ for the failure, the consequences for creditors are similar: in most cases it is unlikely that they will recover their outstanding debts.

    Ask yourself:

    • Are you worried about some of your customers financial situation?

    • Have you experienced late payments or the request to change payment terms mid contract?

    • Do you have an insight into your customers net worth and liquidity, their spread of risks and dependency on major clients?

    • From your experience, would you agree that Cash flow can make or break a business?


    Do this to increase your chances to get paid: 

    1. For  Your Top Clients: Undertake a full financial review.
    If possible, ask for updated financial statements, talk to them on a regular basis about their market and trading conditions.  It could be that they struggle to get paid on time or have cash flow issues for other reasons , eg. loosing bank support, default of major client,lack of capital or simply due to market conditions.
    This could lead to a ripple or  'Domino effect' damaging any unprepared company it comes into contact with.

    2. Be careful when signing new clients and do a thorough credit check upfront.
    Remember 'A sale is not a sale until you get paid'. So don't be tempted or blindsided by the promise of big revenue and do your due diligence before you take on a new business relationship.

    3. Don't get complacent.
    Check in with your customers on a regular basis.  Maintaining regular credit monitoring practises for all existing clients and registering interests and assets on the Personal Properties Securities register (PPSR) can help business significantly to reduce your risk exposure in the event of customer insolvency.

    In a nutshell: Know your customers, their financial position and monitor this on a regular basis. 

    This way you protect your cash flow, the lifeblood of your business. If your Accounts Receivables represent around  40% or more of your assets,  talk to us on how to mitigate the risk even further using Trade Credit Insurance.
    If you are keen to know more about this fantastic Risk Management Tool (yes, a tool not just an insurance) and how it could help you grow safely and more profitable, we can look into this together.

    Credit Insurance – A Risk Management Tool:

    Most businesses insure their plant, their equipment and yet do not insure their Debtors Ledger which on a typical balance sheet represents an average of 40% of their current assets.
    Trade Credit Insurance is a business insurance product that protects a seller against losses from non-payment of a commercial trade debt. It makes sure invoices will be paid and enables companies to reliably manage the commercial and political risks of trade that are beyond their control. Capital is protected, cash flows are preserved and profits are secure from these events of default.

    There are several major benefits by investing in a Trade Credit Insurance policy. A Trade Credit Insurance Policy provides you with valuable tools to manage your buyers’ portfolio.

    • Even if you experience no claims,
    • the transfer of knowledge about new buyers,
    • the worldwide presence of risk experts assisting you with local market intelligence and
    • the ability to monitor your risks in real-time enable you to grow faster,
    • offering more competitive terms than without insurance.
    • It is in this way that a credit insurance policy can typically offset its own costs many times over even without making a claim.
    • In addition banks will most likely lend more capital against insured receivables, and may also reduce the cost of funds.
    • Insuring receivables frees up capital for the company and is tax deductible, bad debt reserves are not.
    • In the event of a claim, costs can be reduced through professionally handled collection of your unpaid invoices worldwide.

    How does a credit insurance policy work:

    1. At the onset of the policy the credit insurer will analyse the credit worthiness and financial stability of the policyholder’s insurable customers and assign them a specific credit limit. It is noteworthy that it is the insurer’s responsibility to proactively monitor its customers’ buyers throughout the year to ensure their ongoing creditworthiness. They gather and evaluate information through buyer visits, public records, bank and financial statements and information received by other policyholders that sell to the same buyer.
    2. Throughout the policy year, the policyholder may request additional coverage on existing buyer should that need arise, on a new buyer and even discuss coverage for potential buyers in a new country. This information is constantly updated and cross referenced.
    3. If warning signs occur showing changes in payment behaviour, reflecting a buyer is in financial difficulty, the insurer proactively informs the policyholders often in conjunction with an action plan to mitigate the risk and helps to avoid foreseeable losses.

    Benefits for a typical Trade Credit Client linking their credit management with the insurer’s risk assessment, risk monitoring and claims management:

    Trade Credit Insurance

    Claims payment:
    If a loss occurs, the indemnification aspect of the policy is triggered. A policyholder would file a claim with supporting documentation, and the insurer would pay the claim benefit, for a domestic insolvency claim typically within 30 days from receiving all necessary documents. As a minimum the following information is needed: A statement of account detailing the unpaid amount and invoices. A copy of all your unpaid invoices, evidence of any past trading history and evidence of the insolvency of the buyer and that your debt is outstanding in the insolvent estate). All polices attract a deductible ( i.e. an amount which is not covered by the insurer) and an insured percentage depending on the policy type and size of the insured company.

    Sources of risk and types of policies available:
    Sources of risks that may be covered are Commercial, due to Creditor Insolvency or continued non-payment, Political, a non-payment due to an event in your client’s country (e.g. currency transfer restriction, expropriation, contract frustration) or Environmental, non-payment linked to a natural disaster.

    Types of Trade Credit Policies available:
    Comprehensive cover also known as Whole of Turnover: a Customized policy covering the entire buyer portfolio; Export and/or Domestic Turnover. Negotiable Discretionary Limit catering for easy administration of smaller accounts, so your credit management team can approve limits up to a certain threshold.
    SME: An easy to manage policy for small to medium sized companies, providing access to buyer information, collection of unpaid bills and up to 90% of indemnification for undisputed invoices in the event of insolvency or slow payment (Protracted Default).
    Excess of Loss: For customers with an excellent internal credit management seeking the protection for unexpected or major loss events across their entire portfolio.
    Selected Risks: Protection of the Key Accounts over an agreed balance, optional non –cancellable credit limits.
    Industry Specific Solutions: Advance payment to Suppliers cover, Binding orders, Consignment stock, Pre-shipment cover, Receivable Purchasers, School Fee programs, Financial Institution, Retroactive Buyer coverage and more.

    Calculation of premium: the premium is a percentage rate of insured turnover, excluding cash sales, inter-company business, sales to government and agreed debtors. Insurable turnover, type of industry, number and amount of bad debts over the last three years, the credit control procedures in place and the credit worthiness of the larger debtors are all taken into account by the insurer.
    The premium rate is negotiated with the insurance carriers and can be modified by the type of policy, the size of deductibles and first excess of loss and the insured percentage of cover.

    Commercial Trade Credit Insurance is the first true line of defence and protects your profit.

    Are you keen to grow fast and secure? Put us to the test. Get in touch.