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Trade credit insurance FAQs

  • What is trade credit insurance?

    Trade credit insurance protects businesses by minimising the financial implications if a customer fails to pay them. It provides covers for businesses against commercial and political risks that are beyond their control.

    • Commercial risk – the risk that the business’ customers are unable to pay outstanding invoices because of financial reasons, such as declared insolvency or failing to pay within agreed timescales as set out in terms and conditions (ie. protracted default).
    • Political risk – the risk that a customer does not pay or pays later because of events outside the business’ or customer’s control. For example due to political events (wars, revolutions); or economic difficulties, such as a currency shortage that causes problems transferring money internationally. Many trade credit insurance companies now offer comprehensive political risk cover as part of a standard credit insurance policy.

    Trade credit insurers typically also have extensive knowledge of companies, sectors and economic trends that enable entrepreneurs to trade with confidence and grow their businesses safely.

  • Why would businesses need trade credit insurance?

    The main reason a business would take out trade credit insurance is to reduce financial implications if a customer fails to pay. Without trade credit insurance in place, many more companies would suffer large financial losses, redundancies and put the business’ existence at risk. 

    However, trade credit insurance does not just protect businesses against any losses as a result of a customer being unable to pay their debts. Trade credit insurance also:

    • Helps businesses sell to new customers that may otherwise have been deemed too risky, knowing they are insured should the customer not pay their debts.
    • Provides additional support and knowledge to help the business avoid losses in the first place and help them grow safely.
    • Provides comfort to banks that the insured has a more secure financial position than otherwise may have been the case, which may in turn enable businesses to access additional bank finance.
    • Helps secure export business, giving confidence to explore new markets and being able to offer more competitive terms.
    • Helps free up capital for the business to use elsewhere, through a reduction in their bad debt reserve (an amount businesses expect not receive because some customers fail to pay).
  • Who should get a trade credit insurance policy?

    Trade credit insurance can be suitable for companies trading on credit terms and insurers can provide cover to businesses of all sizes from SMEs to multinationals.

    If you are interested in taking out trade credit insurance you can speak to a general or specialist credit insurance broker. Their knowledge can help businesses get the most appropriate cover for their needs at the best price. Alternatively, businesses can also buy credit insurance directly from an insurer.

  • How does an insurer decide on the risk of a company making a claim?

    At the start of a policy, the insurer will assess the creditworthiness of the business’ customers and then give each of them a specific credit limit, which is monitored regularly. This is the amount the insurer would cover if that customer cannot pay their debts.

    Throughout the policy term, a business can easily request new credit limits or additional coverage on existing buyers or new buyers if necessary. The insurer will then judge the risk of the new coverage, giving the business a detailed explanation for their decision.

  • When does credit insurance pay out?

    Trade credit insurance will pay out a percentage of the outstanding debt to a business. This usually ranges from 75% to 95% of the amount, depending on the type of cover the business has.

  • If an insurer withdraws cover for a company, can this cause them more financial problems?

    Withdrawing cover is normally a last resort; credit insurers will usually try to resolve the situation by engaging constructively with the insured’s customer before it gets to this stage. When credit insurance cover is removed, this does not stop a business from continuing to trade with their customer if they want to.

  • How did trade credit insurers respond during the financial crisis?

    Trade credit insurers helped protect businesses from not being paid for goods and services due to the insolvency of their trading partner or when they failed to pay within the contract terms. ABI figures show ABI trade credit insurers paid £286m to businesses in 2009, helping them to mitigate the effects of not being paid, which could have put the business’ existence at risk. For many businesses at this time, having credit insurance gave them peace of mind, knowing they were protected against the potential financial stress of not being paid.

  • How is a company meant to survive difficult financial times, if trade credit insurers always remove their cover from their suppliers?

    If trade credit insurance cover is removed, this does not stop a business from trading with their customer if they want to. Businesses can offer stricter payment terms to their customers or continue to trade without supplying goods or services on credit.

    Meanwhile, the business customer that is going through difficult financial times has a wide range of options available to help them address and resolve their financial problems, for example arranging a Debt Management Plan.

  • Are trade credit insurers involved in/responsible for the collapse of large companies and retail chains?

    We cannot comment or speculate on the individual and specific reasons that has caused some large high street firms to collapse. However, financial difficulties they experience will predate any action by credit insurers (such as removing cover) to protect their insured customers.