Trade credit insurance

What it means

Trade credit insurance covers the risk that a customer fails to pay through insolvency or prolonged default. The insurer pays an agreed percentage of the unpaid invoice.

The insurer sets a credit limit for each customer on its own assessment. Above the limit, or with none granted, you supply at your own risk even though the policy is live.

Unlike factoring, insurance does not bring the money in sooner. The receivable stays with the company and on its balance sheet; the insurer pays only once the loss is accepted, and until then the company funds the credit period itself. Non-recourse factoring combines both functions but usually costs more.

How it works in practice

Where revenue concentrates on a few large buyers it costs less than the hit from one unpaid project. With many small customers it does not pay and deposits are the answer.

The insurer demands discipline: report arrears on time, keep to agreed terms and maintain the sub-ledger. All of which helps the company with or without a policy.

For clients with credit insurance we prepare a monthly list of overdue invoices by customer and days late. It shows where the deadline for notifying the insurer is approaching and also tracks days sales outstanding, which the insurer often looks at when renewing the policy.

What to watch out for

Insurance does not replace an impairment allowance in the books or the work of collections. Stop chasing because you hold a policy and you lose the right to claim on it.

A credit limit can be reduced or withdrawn during the year when the insurer sees a customer’s creditworthiness weaken. Deliveries after that change are no longer covered, even though the policy runs on. The notice of a limit change must therefore reach the sales team, not sit in the finance department’s inbox.