No business owner wants to think about the worst-case scenario, but financial uncertainties happen more often than you think. Credit risk management is an essential part of running a business, particularly if you’re involved in international trade. If you’re thinking about purchasing a credit risk management insurance policy, you may have some questions about what this insurance protects.

If so, you’re in the right place. In this blog, we’ll consider a sample trade credit insurance policy, and discuss the different coverages that are available, what you can expect to pay, and more details.

Sample Coverage For A Credit Risk Management Insurance Policy

Before we get into the nitty-gritty details of a credit risk management policy’s limitations and cost, let’s discuss what events are actually covered by the trade insurance policy itself. These policies are designed to aid in credit risk management and ensure you can trade with confidence when extending a line of credit to a buyer, whether in domestic trade or international trade, and are domestic and export customers.

This is accomplished by insuring your accounts receivable from bad debts, and ensuring your cash flow remains stable and steady. They will pay out if:

  • A customer or client becomes insolvent, bankrupt, or otherwise is unable to pay – resulting in a protracted default
  • A customer or client becomes impossible to contact and does not pay, or a court judgment is issued against them

In this instance, a credit risk management insurance policy helps ensure that you are paid for your goods and services issued on trade credit and minimises the impact of disrupted cash flow. Depending on your policy, you may be compensated for between 75-95% of the value of the debt, helping you carry out your operations seamlessly.

In addition, many credit risk management policies are also sold with political risk insurance, an imperative element business owners should not overlook. This type of credit risk management insurance is similar, but it protects you from political risks such as:

  • The expropriation or seizure of your assets by a foreign government
  • Political violence (war, insurrection, terrorism, etc.)
  • Banking and currency conversion issues or inability to move currency to your country
  • Breach of contract or contract frustration by a government
  • Business interruption

Additional Benefits Granted By This Credit Risk Management Policy

Fortunately, a credit risk management insurance policy doesn’t only provide coverage for unforeseen financial events — it can also provide assistance should your business need to take further action to rectify a situation.

For instance, one of the additional benefits offered by most credit risk management insurers is that, if you need to take legal action against a client who has not paid, these costs will be covered by your credit risk management insurance policy. The cost of hiring a debt collection service and other related fees may also be covered by your policy, giving you added peace of mind.

Limitations Of Coverage with Your Credit Risk Management Policy

Like any insurance product taken out by a business, there are some limitations to coverage that business owners must be aware of and factor into their decision-making.

The specific limitations of your credit risk management insurance policy will vary, based on the policy you purchase. However, it’s important to note that most policies will not cover customer disputes which result in non-payment.

For example, if you deliver a $100,000 order to a customer, and they claim that the items were missing, damaged, or not satisfactory, and they do not pay, you cannot simply turn to your credit risk management policy for compensation. You must engage in arbitration and negotiations with the customer, and go through the proper legal channels to resolve the dispute. Therefore, it is your responsibility to assess the risk of non-payment yourself when dealing with clientele. However, if this is outside your capacity, you may want to seek Single Buyer insurance to mitigate this risk.

If you require further assistance understanding the details and limitations of your credit risk management policy, the experienced team at Niche Trade Credit is happy to help.

Trade Credit Discretionary Limits

Another limitation businesses must consider when choosing a credit risk management policy is its discretionary limit, as it determines the amount of flexibility you have with your policy. When you purchase a credit risk management insurance policy, your insurer will likely give you a discretionary limit. This limit outlines the maximum business credit limit you can issue to a customer without getting approval from your insurer.

In other words, if your credit risk management policy offers a discretionary limit set at $50,000, you cannot sell products or services on credit to a company in excess of that limit, unless you contact your insurer, and they perform a credit check and other necessary due diligence checks, and issue their approval for the transaction. You will always be vulnerable to debtors if you sell goods or services on credit terms.

Understanding Premium Costs with Your Credit Risk Management Policy

The final and most important factor of any credit risk management insurance policy is the premium. Your premium costs are usually calculated as a percentage of your overall revenue. The most common rate is at 0.1 to 0.3 cents per dollar of revenue. So, if your business did $5 million in sales per year, you could expect to pay around $10,000 in insurance premiums.

This will vary based on if your business has a history of collecting bad debt, the companies with which you’re working, the average value of your transactions, and a number of other factors. Your own export credit risk management insurance premium costs could be higher or lower than this number.

Need More Help Understanding Trade Credit Insurance? Contact Us Today!

Deciphering the intricacies of a credit risk management insurance policy can be difficult. But with the experienced and insightful Niche Trade Credit team at your side, this task is made a breeze.

If you’d like us to provide you with a sample credit risk management insurance policy and walk you through the coverage you can expect in more detail, contact the team at Niche TC right away.

We can help clear up any questions you have about our credit risk management insurance products — and our insurance brokers can help you find the right policy, tailor-made to your particular needs. Get business insurance today and get started!

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