Taking Out Credit Insurance on Business Debt
Why a Credit Insurance Policy on Debtors Makes Good Business Sense
Sep 21, 2009
Taking out a credit insurance policy on unpaid customer receivables is an important risk management tool for businesses that reduces exposure to bad debt and helps to stabilize cash flow. Generally, credit insurance is targeted to big businesses with an extensive, often multi-national customer base. But under difficult economic conditions, even smaller businesses should consider using this insurance product as part of their risk management strategies.
What is Credit Insurance?
Credit insurance (also known as trade credit insurance) is an insurance policy that protects the insured business from clients who fail to pay their invoices due to insolvency or bankruptcy. Credit insurance usually covers a portfolio of the business' customers. But it is also possible to cover single transactions or trade with only one customer. Moreover, a business can insure against the chances that a customer will refuse to accept the goods that have been produced.
Though coverage varies from company to company, credit insurance policies generally cover about 90% of the insured debts as long as the insured business maintains a credit limit on each of its customers.
The premium charges for this product generally reflect the average credit risk of the insured group of customers. It should be noted, however, that credit insurance premiums vary greatly depending on the size of a business and its industry as well as on the credit terms that the business extends to its customers. Payments are made on a monthly basis and are calculated as a percentage of monthly sales or as a percentage of all outstanding receivables. Many companies choose to pass these costs on to their customers.
How Credit Insurance on Receivables Can Help a Business
Credit insurance provides an all important a safety net that protects businesses from the financial strain of a customer's protracted default, insolvency or bankruptcy. Though this can be a great benefit on its own, this "safety net" becomes all the more important when a company must do business within a weakened domestic or global economy.
Moreover, to protect their own interests, credit insurance companies have access to an enormous amount of financial and economic data. It is common for a credit insurer to advise a company on whether or not it should do business with a particular customer or region.
Finally, when used properly, credit insurance can be an important element in a company's debt management strategy, ensuring safe and steady growth.
In short, credit insurance is an important risk management tool that should be considered among businesses big and small.
