What is Trade Credit Insurance?
What is Trade Credit Insurance used for?
Trade Credit Insurance provides cover for many of the commercial and political risks faced by a business when selling goods in domestic and export markets.
Who needs Trade Credit Insurance?
Trade Credit Insurance is for everyone involved in either domestic or overseas trade. It protects your financial position and allows you to concentrate on building sales whilst leaving your insurer to watch over your trade debts.
Company domiciled locally as well as their foreign subsidiaries for their transactions with credit terms up to 180 days.
What are the risks covered?
You are covered against non-payment of debt which arising from commercial risks and political risks. Under commercial risks, you are covered against the insolvency of your customers and also their defaulting on payment. Under political risks, trade credit insurance will protect you from financial loss resulting directly from government or political activities in an overseas country (such as government moratorium, non-transfer risks, cancellation of import licence, and occurrence of war or revolution).
Which of my customers are covered? Can I choose?
Trade Credit Insurance cover is on total annual sales turnover basis. All customers invoiced on open credit terms are to be covered. However, selected country cover is allowed.
Some policy holders only required limited protection. A policy which only covers “top trading” customers for insolvency/catastrophe risks only can also be negotiated.
The indemnity level is usually 90% which means the insurer will pay 90% of the value of invoices in the event of a claim.
What is the cost of the cover?
Each policy is priced on a premium rate agreed at the beginning of an insurance period. The premium rate takes into account of a number of factors:
the type of industry you are involved in the turnover of your company to be insured the countries you trade with the number of customers that you have any bad debt experience, etcWhat is the duration of policy?
The policy is usually signed for a ONE year insurance period and is automatically renewed at the end of the year if there is no prior notification (at least one month notice).
Other insurance period of TWO or THREE years can also be considered.
Depending on the performance of the policy, terms and conditions for the renewal is discussed at least 30 days prior to the expiry of the policy cover. Otherwise, the existing terms will be automatically renewed.
When can the insurance cover commence?
Insurance cover can commence only with an approved credit limit. In other words, the policyholder must apply for a specific credit limit for each and every debtor. The amount of this credit limit should reflect as much as possible the maximum outstanding balance that the policyholder has in his books at any one point in time.
Example:
Estimated sales turnover for specific buyer : S$6,000,000
Payment terms : 60 days
The requested credit limit would be: (S$6,000,000/12) x 2 = S$1,000,000
Can the credit due dates of the buyers be extended?
The policyholder may grant one or several extensions of due date to their buyers provided the extensions do not exceed the maximum credit period specified in the policy. These extensions can be provided without prior approval from the insurer.
If the extension required exceeds the maximum credit period, then a formal request and approval from Coface is needed prior to granting it to the debtor.
What do I do if my customers don’t pay me? How do I make a claim?
When the trade credit insurance is set up, you will agree on the normal length of time within which you would expect to receive payment from your customers.
If payment is not received within an agreed timescale, you must send a “notification of overdue payment”.
If payment is still not received within 30 days from date of notification, a “request for intervention” is required.
Will all my claims be paid?
All of your claims will be paid, provided that your customers are covered under the terms of the policy and that the amount of debts outstanding falls within the approved credit limits.
The actual amount which you receive on each claim will be up to the indemnity level of invoices outstanding.
The total amount of claims awarded per policy period will be up to the maximum liability value determined at the beginning of the cover.
When will I be receiving payment of my claim?
The agreed percentage of the debt will be paid:
Within a period of 30 days upon admission of the claim by appointed liquidator in the case of an insolvency. After a waiting period of 5 months from the date of request for intervention in the case of a non-payment of risk.Can I get Trade Credit Insurance protection for trading with any country in the world?
As a member of a world-wide network of trade credit insurance companies and credit information companies (CreditAlliance), we share a common database for risk management and debt recovery.
This network gives us unrivalled local expertise for credit checking on your customers and we can offer cover in over 70% of the world’s trading markets.
We can also provide local service support to your branch offices/subsidiaries located around the world.
What are the advantages for companies to adopt Trade Credit Insurance?
Enhancement of overall credit management function. A good credit management policy encompassing thorough vetting of new and existing clients can significantly reduce the risk of late payment. Complementing it with trade credit insurance would allow the credit management function to greatly ease the restrictions on cash flow. Peace of mind. Reduces repayment risk to the seller. One bad debt can destroy an entire year’s effort. Exploration of new markets. You know your clients, you have been working with them for years and they are triple-A rated. But products changed and new markets emerged and you have to sell to companies you have never heard of. Alternative to letters of credit. Eliminates costly letters of credit and other bank charges. It also avoids buyers from having to tie up line of credit for L/Cs and other credit commitments. Balance sheet protection. You are a strong company and bad debts from time to time are part of life. But what you want to avoid is the big catastrophe or the sudden accumulation of debts that disrupts the financial structure of your company. Cash flow relief. Trade Credit insurance can provide cash flow relief when one of your active customers become insolvent or does not pay. The loss incurred is indemnified by the credit insurer thereby maintaining your cash flow. Financing. You need working capital and have approached your bank for funding. Your bank asks you to pledge your account receivables as collateral, but also wants to be sure that your receivables are of good quality. Showing to them that the receivables are insured is probably the best answer. Access to credit expertise. Trade credit insurance also provides companies with access to professional credit analysts who provide a sounding board and a second opinion for the company’s credit department. This exchange of information is frequently useful in identifying high risk buyers.What are the advantages of trade credit insurance to commercial lenders?
If you are presently lending on accounts receivable, you can obtain protection against excessive credit losses on the receivables they pledge for a loan. A business trade credit insurance policy, which is purchased by your borrower, is written to provide protection against insolvency of a debtor. As the commercial lender, you can be named as the beneficiary of any loss payments made under the policy. The credit limits on named buyers are thoroughly investigated and approved by the trade credit insurance underwriters. This eliminates credit analysis and additional detailed work for the lender. Those approved named buyers are monitored throughout the policy period. If detrimental information is obtained, the borrower may be advised so that the credit line on future shipments will either be reduced or discontinued to avoid any potential losses.
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