Trade Credit Insurance Explained - with examples

How does credit insurance work?

Credit insurance protects you against bad debt. So if the worst happens, you still get paid.

Why do you need credit insurance?

Credit insurance gives you essential cover against credit risks such as non-payments or late payments. If a customer doesn’t pay, you can simply claim against your insurance policy.

The COVID-19 pandemic, the current recession, and the rapidly changing financial health of many businesses have made credit insurance more important than ever. In uncertain times, you need to be certain that your cash will keep flowing. Which is where credit insurance helps.

“We would recommend Coface because the policy is so flexible and easy to manage. When we had to make a claim, the service was very good, and they paid within a month.”

Irene Rous, Credit Control Supervisor, Smeg UK

What does credit insurance protect against?

Credit insurance covers you against bad debt, late payments, political risk, natural disasters, pre-shipment risks, and more. Policies will vary depending on the business and the insurer.

What are the benefits of Coface credit insurance?

Coface has been a global leader in credit insurance for over 70 years. With Coface, you can:

• Safeguard your business against bad debt and establish realistic credit limits for customers.
• Run credit risk checks to monitor the financial health of your customers and assess risk before you trade.
• Access our debt collection service to rapidly collect late payments.
• Unlock better financing options, including more favourable borrowing terms.
• Identify opportunities for growth both domestically and in new markets.

“Coface is a valuable source of information about potential and existing customers and will go out and meet a customer if necessary. That adds significant value for us.”

John O’Connell, Group Treasurer, Origin Enterprises

How does credit insurance work?

When you set up a credit insurance policy, you provide information about your business and customers. This includes a list of top buyers and a recent loss history. We review the financial health of your buyers to establish credit limits and terms of business, such as the maximum invoicing period.

In some cases, automatic coverage up to a certain amount or percentage of sales is granted to give greater trading flexibility.

During the course of the policy, we continually monitor your customers and adjust coverage accordingly. Likewise, as your company expands its sales, new customers can be added to the policy.

You can file a claim when a customer is insolvent or financially unable to pay the balance owed.

“It was very easy to get up and running with Coface. We gave them a list of our account customers, and all the credit limits were in place before we made the transition.”

Rob Bowrey, Chairman Stanley Gibson

How much does credit insurance cost?

After an assessment, we would provide a quote that outlines the policy terms and price. The quote tells you the amount of coverage, the level of coinsurance (typically 10%), and whether there’s a deductible or a minimum amount threshold for claims.

How else can credit insurance benefit businesses?

Better banking terms

Banks are more likely to lend to businesses that have credit insurance, as well as provide larger lines or reduced financing fees for covered receivables. Borrowing costs are also often lower. The opportunities and cost savings provided by trade credit insurance can offset the cost of the policy.

“As traders, we obtain working capital from our bank, and then we receive our money when the customer pays. The banks themselves make credit insurance a condition for access to trade finance.”

Sergio Vignone, Credit Manager

Mitigate against loss

For example, a manufacturer with a margin of 4% that experiences a non-payment of £50,000 would need 25 equivalent sales to make up for a single instance of non-payment. Credit insurance mitigates against this loss.

Save money on expenses

You can cut spending on credit information as that’s covered, and you won’t need to waste resources on chasing collections. Your company can also deduct the cost of the policy as a business expense.

Free up bad debt reserves

Capital set aside as reserves can be freed and converted to earnings.

Increase sales

Credit insurance lets you offer more competitive credit lines to existing customers as well as identify new market opportunities. Making it easier to grow your business. Multiplying this increase by several customers could easily offset the cost of a policy.

A real life example of using credit insurance to increase profits

A business wanted to expand sales with its current customers but was not completely comfortable offering them higher credit limits. They contacted Coface credit insurance to cover the higher credit limits so they could increase the amount of credit offered to customers without risk. This allowed them to grow revenues and deliver more profits.

This business was able to capture £300,000 of incremental gross profit from just one trading partner. These benefits can be multiplied across a broad portfolio of customers.

A real-life example of using credit insurance to improve lending terms

A wholesaler of chemicals and raw materials improved its ability to secure credit by adding credit insurance. The company, which sells to overseas customers, needed to provide more transparency to its lender, who was concerned about foreign receivables in the borrowing base.

“We purchased trade credit insurance initially to facilitate the perfection of our credit line facility,” says the managing director and CFO. “From the initial objective of providing comfort to our banks, the service added depth to our business decisions.”

The interaction allowed the company to assess its clients’ conditions more accurately and has been a valuable tool in business development.