Thursday, April 25, 2024

Credit Insurance

There is always a time lag between delivering a product or service to another company and getting paid. This time lag can cause problems, and it is for this reason that trade receivables financing is common practice. It is also the reason why credit insurance is so important.

The Benefits of Credit Insurance for Companies

There are specialised insurance policies for trade receivables. They have 3 main benefits:
  • Supporting Sales Growth. A company can enter foreign markets with less trepidation that a debtor will default on the payment of an invoice if they have suitable insurance. And a company will have less fear that the country they are trading in might go into a period of political and economic turmoil. Moreover, with credit insurance a company can offer longer payment terms to customers. This makes a company more competitive.
  • Improving Credit Controls. In order to qualify for credit insurance on trade receivables a company must conform to certain credit control requirements. This is beneficial for a company as going forward it will have better credit controls in place.
  • Better Financing Options. A company that uses credit insurance for its trade receivables has better financing options. The trade receivables can be used for factoring in order to generate cash needed for working capital. In certain instances, it can facilitate securitising trade receivables which again releases money tied up in unpaid invoices.

The Cost of Credit Insurance

The cost for insuring trade receivables varies depending on the perceived risk of a non-payment of an invoice. The risk level is reflected in the premium paid for an insurance policy. There may also be legal fees involved to set up an insurance policy. Also there may also be broker commissions to pay. These fees increase the cost of trading. From the perspective of invoice finance companies, the cost of obtaining insurance will be included in the fees for providing factoring services.There are also costs involved in maintaining a credit insurance policy. The insurance provider will stipulate a set of administration tasks for the holder of the policy. This will include putting in place credit control procedures and ongoing reporting of financial transactions. In the event of an insurance claim being made, the credit insurer may insist that it take control of the recoveries process.

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