Trade Credit Insurance 101

Anytime you sell products or services on credit, there’s always a key risk lurking in the background… your customer fails to pay. We’ve heard it all. You know your customers, you do your due diligence, you put everything in writing, and you’ve even budgeted for potential loss, so what’s the big risk? As we’ve seen these past two years, businesses with the best intentions have been forced to close their doors, leaving many suppliers out of luck (and a lot of money).

Commercial transactions frequently rely on credit, meaning there’s a contractual agreement that full payment will be made later versus upfront. However, as a supplier you should not engage in these transactions until you have Trade Credit Insurance.

What is Trade Credit Insurance?

Also known as “Accounts Receivable Insurance,” Trade Credit Insurance protects businesses from significant loss if customers fail to pay a debt due to default, slow pay, insolvency, bankruptcy, or political events. Essentially, it indemnifies up to 95% of the debt owed to you. In addition, the insurance carrier will help you make sure your customers are credit-worthy before you extend terms. From a bird’s eye view, Trade Credit Insurance provides cash flow and capital protection and a strategic tool for future trade negotiations.

Should You Consider Trade Credit Insurance?

Trade Credit customers are primarily growing businesses who need ready access to cash and a Trade Credit policy will allow businesses to borrow at more favorable terms from banks. But anytime you interact with open accounts, Trade Credit Insurance is a wise evaluation. If you fit into one of these categories, you should certainly consider Trade Credit Insurance:

1. Growing Suppliers: These businesses will most likely operate on credit as they need access to cash to fund inventory and receivables.
2. Customer Concentration Issues: If too much revenue relies on a single client, there is high customer concentration. It only takes this one client to lose substantial money.
3. Growing Customer Portfolio: If a business is looking to add customers, it’s important to make sure they are credit-worthy and can collect.
4. Contractors: Typically, this appeals to contractors who bring in more than $10 million in revenue, but because services can’t be retracted once complete, every contractor should weigh this risk.
5. Vetting Accounts Receivable in Acquisitions: Before acquiring another business, ensure their accounts receivable can collect. If certain receivables aren’t insurable, this is a good reason to negotiate a lower price for those assets.

How Does Trade Credit Insurance Work?

An insurance carrier will evaluate your industry, trade profile, and customers to determine your risk profile. Typically, your premium is calculated based on a percentage of your sales. This may reflect sales from one major client or multiple, depending on the potential risk. Either way, it should be a customized experience to avoid overpaying.

Here at Heritage Insurance Advisors, we represent many of the major Trade Credit Insurance carriers. One of the leading providers and our partner, Allianz Trade (previously Euler Hermes), offers national and multinational protection. With free credit management, you can effectively underwrite the credit worthiness of potential customers at no cost beyond the policy premium and benefit from one of the largest proprietary databases in the world. Reach out to connect with a Trade Credit Insurance expert!

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