Trade credit insurance or accounts receivable insurance is a financial tool that protects a company’s cash flow when customers don’t pay for the products or services they’ve ordered. Credit insurance covers foreign and domestic accounts receivable and is used by companies in all industries around the world.

How does it work?

The client submits the customers to be insured to Coface along with the credit limit (coverage amount) needed.

• Coface underwrites the financial condition of the customers individually to arrive at a coverage decision based on the customer’s ability to pay. In plain English, Coface checks the creditworthiness and financial strength of each customer using financial statements, publicly available credit reports, our own industry experience and loss history and finally, the economic and political environment of the country the customer is located in (if outside the US).
• Coverage requests are either approved in-full, partially approved with an explanation of the decision or refused, again with an explanation. Many times, a partial approval or refusal is the result of a lack of financial information to support the requested coverage amount and with more information, the decision can be reviewed.
• Once coverage is approved, the customer is added to the credit insurance policy and sales to that company are protected as the risk of non-payment is transferred to Coface.
• Some policies also allow for “blanket” coverage of smaller accounts. In those situations, no underwriting is required for accounts up to a specific dollar amount of coverage.

What is the cost?

Credit insurance premiums are based on either the annual sales volume to be insured or the amount of coverage approved. As sales or coverage volumes increase, rates tend to decrease. Premiums are calculated by multiplying the annual sales volume by a rate to arrive at the estimated premium. Today’s rates are usually between .10% and .25% (1/10 of one percent to 1/4 of one percent) of the annual sales volume but vary somewhat based on the industry sector, the recent bad debt loss history of the potential client and other factors.

Why is it used?

Credit insurance policies are tailored to meet the specific needs of each client. As a result, the policy structure can vary depending on the objective to be achieved by each company.  The first step in making a policy work, is to properly understand the client’s needs and structure the policy to meet them.

Companies of all sizes use credit insurance for these and other reasons.

1. To protect against a significant loss from key accounts not paying unexpectedly
2. To increase sales by safely extending more credit
3. To make faster, more informed credit decisions on new customers
4. To gain access to better bank financing and more working capital availability
5. To sleep better at night or have more confidence that a large business asset is protected

Conclusion

Companies benefit greatly from the use of trade credit insurance. Usually, there are multiple benefits from having this tool in place. For a no-obligation analysis of the potential benefits, a quote and a financial analysis of your key customers, please contact me!