What is Trade Credit Insurance?
Trade Credit Insurance provides your business with protection against the failure of your customer to pay its trade debts. This can arise because your customer becomes insolvent or because your customer does not pay within the set timeframe. Companies that export can also protect themselves against a range of political risks that may prevent or delay payment. This arises when payment is not received as a direct result of a war in the buyer’s country, cancellation of a contract by the government of the buyer’s country, or when a government implements regulations which either prevent the export or import of the goods – or prevent or restrict the transfer of hard currency – from the buyer’s country.
Why should a company consider Trade Credit Insurance?
On average, 40% of a company’s assets are in the form of trade debts. Sometimes the figure is far higher. It is very difficult for a company to predict which client will default on payment. Close to 50% of all payment defaults arise from vendors with whom stable and long-term trade relationships have been established. The cost to a business of non-payment can be considerable. For example, if a company’s profit margin is 5% and one of its customer defaults on a debt of $100,000, the company will have to achieve additional sales of $2,000,000 to make up for the lost profits. More importantly, the lost cash flow could be devastating. Non-payment weakens your company and lowers its investment capacity. A commercial credit insurance policy helps in the management of your accounts receivables and compensates you in the event of non-payment.
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