Credit insurance has become an integral part of international trade. As a risk management tool, it helps businesses to protect their cash flows from the risk of nonpayment due to political risks, bankruptcy, protracted default, or other reasons. When a client fails to pay for goods or services, trade credit insurance protects your working capital by indemnifying your account receivables to keep your balance sheet credible.
Credit insurance solutions have advanced to meet the demands of an increasingly competitive and complex trading environment. This evolution has led to a growing number of many credit insurance terms. Most of these terms can be complex, and their practical meaning may vary based on your business context.
Common Credit Insurance Terms
Account Receivables
Account Receivables (AR) is the amount of money owed to a company from selling goods or services rendered on credit terms.
Credit Limits
A credit limit is the maximum amount of credit a company or a financial institution will extend to a debtor. It can be used as a credit management strategy to establish internal lending limits to existing customers to ensure your balance sheet remains healthy.
Consequently, trade insurance companies will also need documentation and proof of your credit limits to grant you a policy. As a general rule, you should follow the credit limits defined on your policy when extending credit to customers. Otherwise, you risk violating your business insurance contract, which means you might not receive compensation from your insurance company due to bad debts.
Credit Term
Credit term or payment term is the period after the shipment of goods or delivering a service at the end date of which invoices need to be paid. It’s the time you (the insured) provide to the buyer (customer) for debt repayment.
Rate of Coverage
The rate of coverage describes the percentage of the debt your insurer is willing to cover. Most insurers can cover between 70 and 95 per cent of your invoice cost. However, your rate of coverage will depend on the type of business.
For example, you can expect a higher coverage rate if you’re selling low-margin products, such as metals or oil. High-margin items like bicycles, clothes, or home décor products usually have a lower coverage rate.
Debt Collection
To file a credit insurance claim with insurance brokers, you must first launch a debt collection process. Your debtor must enter a phase of persistent default before you launch a claim.
Your guarantor should also try to collect payment from the defaulting company. If the non-complying company fails to pay, they will be indemnified based on the insurance policy terms, and you will receive the payment.
How Niche Trade Credit Can Help
Understanding how specific credit insurance terms differ in their practical usage can help you run your business smoothly. At Niche Trade Credit, we can provide solutions to help you regulate risk and protect your cash flow.
Call us at 02 9416 0670 if you have a query or need help finding credit insurance or political risk insurance suitable for your small business.
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