Trade Credit Insurance

Trade with confidence knowing that your business is protected if a customer defaults on payment or becomes insolvent to pay for your goods or services.

‘Credit risk’

From the point of view of the supplier, many companies deal on credit terms with purchasers within their county of domicile and also overseas. Particularly in the current economic situation, it is not unusual for suppliers to find themselves facing customers who are insolvent, default on payments, act fraudulently or are unwilling to accept the goods on arrival. The effects of a major debtor’s insolvency or protracted default on a payment can be potentially devastating to any business and may:

  • cause a reduction in profit; or
  • result in considerable legal expense in recovering the amount owed or goods.

What does Trade/Credit insurance do?

Trade/Credit insurance is designed to ensure that a company is not adversely or fatally affected by the unforeseen failure of a customer (or customers), but also as a management tool to the flow of business decisions. Trade Indemnity/Trade Risks cover provides insurance protection against:

  • Financial loss in the case of bad debts arising out of insolvency (of your customers) or late payment;
  • Financial hardship due to poor cash flow; and
  • Costs and expenses associated with the recovery, or attempted recovery of trade debt.

Trade credit insurance may assist businesses in pursuing opportunities outside their comfort zone, such as:

  • supplying to new industries or territories;
  • forming new relationships with bigger clients;
  • extending more credit to existing customers;
  • pursuing sales opportunities on open account terms.

In some cases it is possible to buy cover for specific risks/contracts/customers or export credit for non-payment of specific overseas customers. Cover is available for short-term credit sales as well as for contracts involving medium to long-term deferred payment terms (used by exporters of machinery, equipment, capital goods and turnkey plants).

Trade credit insurance doesn’t normally cover fraud or contract disputes (unless resolved in the insured’s favour), though cover is available for contract repudiation.

It should be noted that purchasers are also faced with trade risks including:

  • Where the goods supplied are not in accordance with the contract of sale. This may necessitate enforced payment by the purchaser, but they may be unable to on-sell or recoup their costs; and
  • Loss of goods in transit.

However, these risks are not the subject of trade indemnity or trade credit insurance. Loss of goods in transit is a potential risk area that should be covered by a marine cargo policy – refer to the Marine Section for details. The cover required, and who should arrange it, should be in accordance with the sale terms (Incoterms) and should be agreed and communicated between the importer and exporter in advance.

From the purchaser’s perspective, the contract of sale should be specific if the date for shipping goods is vital. A letter of credit can specify a latest shipment date and if this is not met, this may allow the importer clear legal grounds for refusing payment.

For purchasers, another safeguard when dealing with a new supplier is to thoroughly investigate their reputation and standing prior to orders being placed. Where a purchasing agent is used, similar checks and close supervision may avoid later costly mistakes or issues. An independent superintendence company to inspect the goods prior to shipment may be advisable, and will establish if there are any problems at an early stage, when the issue is less expensive to rectify.

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