Your Free Online Resource To Learn The Ins And Outs Of Credit Insurance And Risk Management Solutions
Don’t let unpaid invoices disrupt your cash flow. Learn about credit insurance and how it can protect your business from financial losses. CreditInsurance.com provides unbiased information to help you make the best decisions for your business!
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Firstly, What is Credit Insurance?
Imagine this: a major client goes bankrupt, leaving you with unpaid invoices and a significant hit to your cash flow. Trade credit insurance, also known as receivable insurance or business credit insurance, protects your accounts receivable against non-payment.
In other words, credit insurance pays you when your customer (the debtor) does not, simple as that! But how does it work? Take a look at your options below, and keep reading to learn the ins and outs of credit insurance.
Who Uses Credit Insurance?
If your business sells to other businesses on an open account, you should consider using credit insurance. All open account sales involve risk. The more customers you add to your open account, the greater the risk.
Credit insurance, also known as trade credit insurance or accounts receivable insurance, is designed to protect you from this risk.
- Do you allow your customers to pay for goods or services after delivery?
- Does a significant portion of your revenue depend on open account sales?
- Are you expanding into new markets or working with customers with unknown credit histories?
- Would unpaid invoices disrupt your business operations or growth plans?
If you answered yes to any of these questions, it’s time to learn about credit insurance and how it can help your business thrive.
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The Benefits of Credit Insurance for Your Business
Protection against non-payment is a core advantage. It safeguards your business from financial losses due to customer insolvency, protracted default, or political risk (the inability to convert foreign currency).
But business credit insurance does more than just protect against bad debt. It can also:
Increase sales: Credit insurance allows your company to increase sales by expanding credit lines to existing clients, and offering credit to new clients.
Prevent catastrophic losses: A single large default can cripple a business. Credit insurance acts as a safety net, ensuring your business can withstand unexpected financial shocks.
Additionally, credit insurance can facilitate accounts receivable financing, allowing you to leverage your outstanding invoices to secure working capital. By insuring your receivables, you reduce the risk for lenders, making it easier to obtain financing on favorable terms.
Lenders can even be named as beneficiaries under the credit insurance policy, providing them with additional assurance and further enhancing your borrowing potential.
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The tables below illustrate the benefits of Credit Insurance
Catastrophic Loss Protection
Without Credit Insurance
- Forced to hire an attorney or collection agency, incurring additional costs
- The business faces a higher risk of loss and increased risk of bankrupcy
- Lengthy and uncertain legal battles, diverting resources from core business activities
- Many businesses receive only a fraction of the owed amount after a prolonged collection process
With Credit Insurance
- Credit Insurance company handles debt collection and legal proceedings
- The risk of loss decreases significantly, providing financial security
- Credit Insurance company handles claim processing, simplifying the recovery process.
- Insured businesses receive a predetermined amount, ensuring predictable cash flow
Increase Borrowing Potential
Without Credit Insurance
- 70-80% Advance Rate on domestic Sales
- 0% Advance Rate Advance Rate on exports
- Banks will not lend more money due to the higher risk of loss
With Credit Insurance
- Up to 90% Advance Rate on domestic sales
- Up to 90% Advance Rate on export sales
- Banks will lend more money because of the protection
Increase Sales Growth
Without Credit Insurance
- Missed sales quotas due to hesitancy in extending credit
- Reduced market leads to reduced sales
With Credit Insurance
- Achieve sales quotas by confidently offering credit terms
- Expanded market reach with the assurance of protection against non-payment
Common Misconceptions
Misconceptions
- Credit Insurance companies only take strong debtors
- Credit Insurance companies do not cover disputes
- Debtor must be insolvent
- It costs more to use a broker than to buy directly from the insurance company
- Credit insurance is only for high-risk customers
Reality
- You can insure some or all of your debtors
- If a dispute occurs, the Credit Insurance carrier provides a path to resolve the dispute
- Policies pay in the event of insolvency, slow pay and political risk
- Admitted carriers file their rates with the state insurance commissioner and the premium remains the same
- Credit insurance is a valuable tool for businesses of all risk profiles, protecting them against debt and improving their access to credit
What Does It Cost?
Accounts receivable insurance carriers have many different ways to compute premium rates such as sales (coverage, A/R, flat rate, and limit of liability base pricing methodologies, just to name a few). Please know all carriers look for a reasonable spread of risk. If you have one troubled debtor and trying to lay off that one risk, this product is probably not for you.
The two most common methods of computing your business credit insurance premium rates are annual insured sales-based pricing and coverage based pricing:
Annual insured sales based
Many factors go into determining the net annualized premium rate: policy face, industry risk, debtor pool average financial stress score, deductible, co-insurance, and policy features.
Coverage Based
The same factors as annual insured sales-based affect the pricing of coverage based. For businesses with steadier sales and a consistent customer base, coverage-based pricing could be preferable.
Annual Insured Sales Based Example
Generally speaking, the Business Credit Insurance premium is calculated at a rate between $.10 – $.20 cents per $100 of domestic insured sales. This is typically for terms of sale up to 60 to 90 days. Terms of sale n7, n14, n21 up to n30, have lower rates. Export insured sales are calculated at rate between $.20 – $.30 cents per $100 of insured sales. Of course, concentrations in either high-risk countries or high-risk debtors can cause these rates to change.
When domestic and export sales are combined, there can be a blended rate or there can be a specified domestic rate and a specified export rate.
Below is an example of how annual insured sales based pricing works. It is an illustration only. Larger companies with more insured sales/coverage can expect to pay lower rates.
Example:
- $50 million domestic sales
- x $.10 (per $100 of sales)
- $50,000 premium
Coverage Based Example
When you learn about credit insurance, you’ll see the same factors as annual insured sales-based affect the pricing of coverage based.
Below is an example of how coverage based pricing works. It is an illustration only.
Example:
- $5,000,000 of coverage
- x $10/000 of coverage
- = $50,000 premium
Each of these methods have their own strengths and weaknesses.
There is no perfect way to price credit insurance. As a general rule of thumb, if you are regularly making changes and need coverage decisions from the carrier, annual insured sales based pricing is often a good solution.
If you have stable clients and coverage needs (not frequently adding, removing, increasing, decreasing) coverage based pricing may be a better fit for your company.
Contact a Professional
Are you concerned about rising premiums or finding the most cost-effective coverage for your business? It’s time to speak to a professional.
Working with a specialist can help you compare different pricing models, understand the factors that impact your premiums, and find the credit insurance solution to safeguard your cash flow.
Latest Articles
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Frequently Asked Questions
A. No. Credit life or credit disability insurance is obtained by individuals to help pay debts in case of loss of income. Business credit insurance (also known as trade credit insurance, export credit insurance, or just credit insurance) is used to reduce the risk of non-payment in B2B transactions and is obtained by the company offering the goods or services, rather than the company receiving the goods or services.
A. There is no additional fee to use a broker. By law, you will pay the same rates for the coverage you choose, whether you use a broker or work directly with the insurance company. However, a broker can be a valuable resource, helping you evaluate quotes, implement your new accounts receivable insurance policy, and navigate mandatory reporting requirements. They may also assist with future claim submissions.
A. The short answer is yes — because things can change. Business insolvency is predicted to increase due to global events. Evaluating the risk of non-payment requires considerable data collection and analysis. Your credit insurance broker can help you figure out the right amount of coverage for your situation.
A. Trade credit can help you grow your business. When a business is able to purchase goods or services with trade credit, it frees up cash flow, making it a source of short-term financing. This practice allows the business to potentially expand its market or customer base without the negative impact of running out of cash, potentially putting it out of business.
Many trade credit agreements incentivise paying early with a discount, so the business is able to decide whether to pay early at a cheaper price or to take longer to pay at full price based on both money coming into the business and other expenses that need to be paid.
However, it also comes with the inherent risk of non-payment. Accounts receivable insurance can mitigate this risk by protecting you from losses due to customer default.
