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Understanding the Coverage Of Trade Credit Insurance Policy And Eligibility Criteria

Many commercial buyers look for credit options when making large purchases of goods or services. But this can put the supplier at risk as the customer can file for bankruptcy, or the supplier may receive only a portion of what was decided as remuneration or even nothing at all. This can become prevalent for unsecured debts where the creditor does not have any collateral backing up the loan. Therefore suppliers should look for a trade credit insurance company that offers this insurance as it can eliminate the risk by compensating the policyholder for the unpaid debt up to the applicable coverage limits. 

What Do All Trade Credit Insurance Include?

The primary function of this insurance is to protect sellers against buyers that do not or cannot pay the due amount. The policy covers against a buyer with bankruptcy or similar status and against buyers who delay payments under a bankruptcy protection arrangement. These policies are flexible and allow the policyholder to cover the entire portfolio or just the main accounts against corporate insolvency, bankruptcy, and bad debts. When a buyer cannot pay, the insurance will pay out a percentage of the outstanding debt, which usually ranges from 75% to 95% of the invoice amount but can be higher or lower depending on the type of coverage purchased.  

A trade credit insurance policy company offers insurance that covers risks of both non-payment and delay in payment of debts. Both of these issues are covered under the following:

  • Commercial risk refers to a buyer's failure to clear the outstanding amount or invoice due to financial reasons like insolvency, bankruptcy, protracted default, and more. 
  • Protracted defaults: This is when the buyer fails to pay the receivables within a predefined time slot from the due date of the receivables.
  • Political risks: Occurs when there is a loss of payment during exports due to political unrest like war, natural disasters, moratorium, license cancellation, transfer restrictions, or export/import restrictions. This non-payment by the buyer is due to external events beyond the control of both parties. It also covers any action undertaken by the local government, like license cancellation, import-export restrictions, currency shortage, or any other economic limitations.
  • Insolvency: This is the protection against non-payment if the buyer becomes insolvent. 

Trade credit insurance can also be extended to cover situations like pre-shipment coverage based on each shipment; claim payment directly to the policyholder's lending institution; preference claims associated with bankruptcy; and risks related to inventory on consignment. 

The only thing that is not covered by a trade insurance policy is when the risk being transferred does not connect directly to an underlying trade transaction. A trade credit insurance policy cannot cover outstanding debts if no direct trade link exists. 

Eligibility Criteria For Trade Insurance

Trade credit insurance applies to any company that sells goods and services on credit terms and is exposed to the risk of non-payment; domestic suppliers and exporters of goods and services; and large, medium as well as small commercial enterprises.

When Can You Not Claim Trade Credit Insurance?

You may not be able to claim the insurance policy if the delay in payment or loss of debts is due to factors like reverse factoring policy, trade disputes, risk of currency fluctuations, commercial credit related to interest, or penalty for repayment, if it is a single buyer or single shipment, or if the loss is covered through Letter of Credit or Bank Guarantees. 

When Can The Insurance Claim Get Rejected?

Your trade credit insurance claim can be rejected in case of late claim filing, i.e., filing the claim after the maximum reporting period; claims on risks that are excluded from the policy and these exclusions could include specific territories, certain definitions of goods, and payment conditions; non-disclosure of important information while filling out the trade credit insurance form and this information could be related to the history of payment defaults, debtor information, etc.; if the business continues shipping to buyers already overdue on their payments; and when goods are supplied without receiving advance payment as per the contract. 

Which Businesses Should Buy Trade Credit Insurance Policy?

Small businesses need a trade credit insurance policy as it can provide protection against catastrophic events. A single case of buyer's insolvency can have serious impacts on the finances, which can also bring down the growth rate. Hence, trade credit insurance is essential for the overall resilience of a business. 

Larger businesses may extend a long credit period to their different buyers but if even one buyer defaults on payment, then the business can absorb the losses, but in the case of multiple defaults, it can have adverse effects. 

To Sum Up

Trade credit insurance is important to all businesses, irrespective of their size. The insurance policy can save you from many financial disasters and also help in enhancing your business growth.

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