Trade Credit Insurance Vs. Surety

June 10, 2022

Determining the best way to safeguard your business can be challenging. You might be wondering, “what type of insurance do I need to carry out international trade? Does the company require bonds? What is a surety bond, and what categories of surety bonds are available?” At Niche Trade Credit, we will help you find the right option by highlighting the difference between surety bonds and insurance.

Understanding Trade Credit Insurance

Trade credit insurance is a risk management product and insurance policy where the insured protects its accounts receivables from potential losses arising from bad debts. This means that trade credit insurance ensures that invoices sent to customers are paid if the customer defaults on payment or becomes bankrupt or insolvent.

Depending on the policy, the insured, and the insurance company, a company’s account receivables can be protected from risks arising from a single buyer or invoice. Besides, you can get a policy covering your business’s accounts receivables.

How Trade Credit Insurance Works

Suppose you deliver a shipment to a customer abroad, and they fail to pay due to insolvency, bankruptcy, political risks, or protracted default. In that case, you should receive compensation from your insurance company. It is essential to note that the settlement is up to the limits of your coverage.

You can recover about 75-100% of the entire transaction. This helps protect your cash flow even if your customer fails to pay the outstanding debt. Trade credit insurance or export credit insurance is an excellent way to guarantee business continuity.

What Are Surety Bonds?

A surety is a legally binding contract or agreement that involves three parties:

  • Obligee – The company or individual receiving the obligation or one who is protected by the surety bond
  • Principal – The individual who purchases the surety bond and is also responsible for meeting the requirements of the contract
  • Surety – This is usually an individual or an insurance company that supplies or issues the bond and assures the obligee that the principal will meet the terms of the contract.

Typically the surety company acts as a guarantor for the surety bond. If the principal fails to carry out the task agreed upon in the contract, the surety company should compensate the obligee. On the other hand, the surety should receive penalties from the principal as per the terms of the agreement.

In most scenarios, the bonding company receives a premium from the principal for the surety guarantee. Surety bonds are an excellent way to assure clients that the other party will live up to the terms agreed upon in the contract.

Types of Surety bonds

Some of the common types of surety bonds include:

  • Advance payment bonds
  • Customs bonds
  • Retention bonds
  • Tender or bid bonds
  • Performance bonds

Which Technique is Right for My Business?

Both Export trade credit insurance and surety bonds can protect your company, depending on the nature of your business and customer relationship. For instance, suppose you are a trader and feel that political risks may hinder your customers from paying.

In that case, it is advisable to go for export credit insurance. On the other hand, surety bonds may be suitable in industries where you must properly carry out a project. If you don’t, your client will be compensated.

Contact Niche Trade Credit

Call us at (02) 9416 0670 if you’re unsure about whether you should invest in a trade credit insurance policy. We will offer the advice you need to ensure you make a more informed decision regarding your business.

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