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How trade credit works

The below infographic explains the trade credit insurance process:

A credit insurance policy is designed to meet the needs of the policyholder’s business and is actively managed throughout the lifetime of the policy.

The cost of a credit insurance policy is based on the following factors:

  • Insurable turnover – Businesses will need to indicate business’ credit sales per annum, confirm credit sales for the previous period and year to date. Businesses may also be asked for the previous year’s turnover.
  • Trading sector – Businesses will be asked which sector they trade in and who their customer base is.
  • Past loss history – Businesses may be asked to provide details of any bad debts incurred by the business and any overdue accounts currently on the books.
  • Credit control details – Businesses will be asked to indicate the steps usually taken to collect receivables. For example, how many days after invoice they follow up, when they put a stop on the account or when they normally engage a debt collector.

As part of the policy, the credit insurer will monitor each of a business’ insured customers, assigning them each a credit limit, which is the amount the insurer will protect them if that insured customer fails to pay.

Monitoring of a business’ customers can be done using a variety of sources, for example:

  • Analysis of financial statements
  • Information supplied by other policyholders that sell to the same customer
  • Public records
  • Visits to the customer

Buying a credit insurance policy gives the policyholder access to an extensive information network which acts as an effective early warning mechanism for adverse customer trends. The relationship between the insurer and the business/policyholder does not remain static as the credit provider will be there to support a company when trading.

Throughout the lifetime of the policy, the credit insurer will inform the business of any changes that might impact the financial health of their customers and their ability to pay them for goods or services delivered. They will then establish a plan with their customer to mitigate the risk.

The terms of cover may change over the lifetime of the policy to reflect the financial strength of any customer and it is the responsibility of the insurer to proactively monitor its policyholder’s customers, to ensure their continued creditworthiness.

During the policy period, a business may request additional coverage for trade with any of its customers. The credit insurer will then evaluate the risk of increasing cover and either approve or decline the additional credit limit request, with a clear and timely explanation. A business can also request a credit limit for a new customer under an existing policy.