Trade credit insurance is an excellent safety net for your small business if you work with international companies. It protects your business from commercial debt and non-payment caused by protracted default, customer bankruptcy, insolvency, or political risks. Also, with trade credit insurance, you don’t need to hire a debt collection service.
The primary purpose of trade credit insurance is to protect your business’s accounts receivable. And it works in a straightforward manner; if your customers are unable to pay for your goods and services as specified in your credit terms, your trade insurance company will reimburse you.
That said, what is the trade credit underwriting processing? In this article, we’ll discuss essential steps in the process of underwriting trade credit insurance.
Steps In the Trade Credit Insurance Underwriting Process
Once you’ve signed a credit insurance policy, you’ll be required to provide your insurance company with a complete list of buyers to whom you sell goods on credit. This is part of the requirements of the provisions of the insurance policy. The list submitted essentially should include these steps:
1. Collect Information about Each Buyer
Your trade credit insurer will obtain comprehensive details of each customer, including their company name, address, VAT number, and country. The insurer will then use a credit management tool to assess the credit risk of each buyer and establish the possibility that they will default. Further, the total cost of insuring all your clients will be calculated and recorded in a credit portfolio.
2. Determine the Credit Limits for Each Client
The insurance underwriter will determine the amount of credit limit allowed for each customer. This helps ensure that your business sells goods within your credit terms, so you don’t expose yourself to excessive risk.
3. State the Steps to Be Followed If a Buyer Fails to Pay
A trade credit policy protects your business when buyers fail to pay.
However, every business is unique and may require unique approaches too. Your insurance underwriter will help you to craft a tailored policy and state what happens when a buyer fails to honour the agreement.
Your policy may include the time frame for pursuing reimbursement and processes and procedures to be followed to launch a compensation claim.
In addition, the underwriter will work with you to determine the percentage of your compensation. Note that a trade insurance policy does not cover the full amount of your losses. Instead, they only compensate for a certain percentage, usually about 75 to 85 per cent.
4. Accept Your Trade Credit Insurance Policy
At this last step, all your clients will have been fully rated. You just need to accept your policy, and coverage will commence immediately.
How Niche Trade Credit Can Help
Niche Trade Credit is Australia’s leading trade credit insurance brokerage. If you’re yearning to protect your business from bad debts, we can provide the information and help you need. Contact us at 02 8416 0670 to learn more.
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