Trade credit insurance

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Page written by Chris Godfrey. Last reviewed on September 24, 2024. Next review due October 1, 2025.

Trade credit insurance (TCI), also known as accounts receivable insurance, debtor insurance, or export credit insurance, is a business insurance that compensates organisations if their customers fail to pay for supplied products or services. Non-payment may be because of bankruptcy, insolvency, or political upheaval in the countries where the trading partner operates. TCI can help businesses to protect their capital, stabilise their cash flow and support them to secure better financing terms from banks, as lenders can be sure their client’s outstanding invoices will be paid under any circumstances.

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How does trade credit insurance work?

Trade credit insurance is designed to mitigate the risk of non-payment by a company’s customers. To establish a trade credit insurance policy, insurers will scrutinise the volume of trades a client engages in, the credit risk of its buyers, the industry in which it operates, and the repayment terms to which their buyers have agreed. As you may expect, the higher the risk of non-payment, the higher the cost of the policy, although typically, coverage will cost less than 1% of the insured sales volume. Most trade credit insurance policies will cover payments for products and services that are due within 12 months.

Businesses can tailor their insurance coverage to fit their budget and will usually have the option to cover all or some of their clients. They may also choose to insure only one customer —especially if it’s a large or particularly risky account. Based on the financial strength of a client’s insured trade partners, insurers will typically assign each customer a set credit limit. Should a customer fail to pay for delivered goods or services, the insurer will only cover losses up to the pre-agreed ceiling.

Trade credit insurance at a glance:

Trade credit insurance reimburses companies when their customers are unable to pay because of insolvency or destabilising political conditions.
Insurers typically price their policies based on the size and number of customers covered under the policy, their creditworthiness, and the risk inherent to the industry in which they operate.
Companies can choose to insure all their buyers, a group of specific buyers, or even just one

Who needs trade credit insurance?

Trade credit insurance is essential for:

Businesses that sell to customers in risky or politically volatile parts of the world.
Businesses that have one major client they sell to on extended credit terms.
Businesses seeking fast growth without the risk that comes from accruing many new customers.
Businesses that provide trade credit to customers in regions where capital controls are in place.

What does trade credit insurance cover?

Trade credit insurance cover falls into two main categories:

Commercial risk: Covers the risk that the policyholder’s customers are unable to pay their outstanding invoices because of financial reasons, for example, declared insolvency or protracted default.
Political risk: Covers the risk of non-payment as a result of events outside the policyholder or their customer’s control – such as political events (wars, revolutions); disasters, (earthquakes, hurricanes); or economic difficulties (currency shortages meaning inability to transfer money owed from one country to another).

What are the benefits of trade credit insurance?

Trade credit insurance can provide multiple benefits to insured businesses:

Protect against non-payment: Should a customer be unable to pay its debts due to insolvency or protracted default, trade credit insurance will pay out a percentage of the outstanding amount owed (typically around 90%).
Boost sales growth: Because they know they will be reimbursed if their customers do not pay their debts, businesses can safely sell more to existing customers or expand to attract new customers – actions that may have previously been deemed too risky.
Expand into new international markets: TCI can protect businesses from the risks of exporting overseas.
Obtain better finance terms: Banks will typically lend more to businesses who have trade credit insurance in place.
Free up working capital: Trade credit insurance helps free up capital for the business to use elsewhere instead of reserving it to cover the possibility of non-payment.

How much does business credit insurance cost?

No two trade credit policies cost the same. The premiums for your trade credit insurance will depend on your type of business, the value of your sales, the scale and creditworthiness of your customers, the level of risk attached to the territories where you sell, the amount of cover you choose and the limit of your policy excess.

What are the alternatives to trade credit insurance?

You should obtain commercial property insurance as soon as you exchange purchase contracts on the property. Unseen events that damage or destroy the property can occur at any time, so it is recommended that you get cover immediately and do not wait until you physically occupy the building or start trading from the premises.

Top tip: If you do not intend to occupy the building within 30 days of taking out your insurance, you must tell your insurer.

What other business insurance do I need?

Businesses can choose other methods to protect themselves from non-payment by their customers.

Self-insurance

When businesses self-insure, they create a reserve fund to cover losses from unpaid accounts. Although there are no premiums to pay, the downside to this strategy is that a company may have to set aside a large amount of working capital for loss prevention instead of using that money elsewhere to grow the business.

Third-party factors

Companies can also sell their account receivables to a third party known as a factor. This is a lender who buys your outstanding invoices and then attempts to collect the receivables itself. A factor will typically purchase your account receivables at a discount—usually paying you 70% to 90% of the invoiced amount – although you can receive the funds within a few days of issuing the bill instead of waiting weeks or months for your buyer to pay.

You may receive a larger percentage of the invoice value if the factor manages to collect the full debt, but you will still have to pay a substantial fee for the factor’s services. Additionally, should the factor fail to recover any or not enough of the debt within a set timeframe – typically 90 days – they may reject the invoice and claw back the money they have paid you in advance.

Note: An alternative to factoring is invoice financing. This works much like factoring, but you remain responsible for chasing your buyers for payment, not the lender. The main advantage of this system is that you keep control of your sales ledger, and your customers need never know you are borrowing against their debts.

Buyer’s letter of credit

Companies that trade overseas could obtain a letter of credit from their buyer. This is a guarantee from the buyer’s bank that you will be paid in full by a specific date. However, letters of credit can only be obtained and paid for by the buyer, and they may be reluctant to pay a transaction fee of anywhere between 0.75% and 2% of the invoice value to obtain the bank’s guarantee. Additionally, a letter of credit will only pertain to a single buyer, putting the onus on you to protect your other receivables.

How Swoop can help

All business involves risk, but that doesn’t mean you have to suffer the consequences if things go wrong. Don’t let unpaid invoices become a burden on your business. Contact Swoop today to compare top-quality trade credit insurance policies and to discuss all your business insurance needs.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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