Credit insurance is an important tool that help companies securing their local or international trade. Mainly used by large companies, it attracts more and more SMEs that are involved in international trade.
What does credit insurance cover?
Credit insurance (also named trade credit insurance or export credit insurance) is an insurance policy meant to protect the insured’s account receivables against loss due to client’s default, insolvency or bankruptcy. If a client does not pay or pays very late, credit insurance can cover part of the outstanding debt.
What is the maximum cover you should have?
Credit insurance can be purchased for the whole portfolio of clients or only a selected few. Level of coverage is a percentage of the outstanding debt, and it usually covers 75% to 95% of the debt. This ratio will be negotiated at the beginning of the contract and will impact the costs.
How does it cost?
Minimum premium for credit insurance is usually quite high. This is why the majority of businesses will self-insure and take the risk by themselves. Number of insurers willing to underwrite credit insurance is also limited, so most underwriters tend to be picky with the risks and prefer covering the whole book debts rather than a selected few.
Difference between credit insurance and surety bond
Bonds is another type of financial guaranty insurance but the purpose is completely different: it is to secure a customer that the job requested will be completed according to the terms of the contract. Surety bonds are issued by insurance companies to secure the contractual agreement.
Is credit insurance compulsory?
Credit insurance is of course not compulsory, but it may be required by a bank in exchange for financing facilities from them: if your company needs to borrow money to finance expansion of the business, bank may tied the credit line to a credit insurance, and in that case, you will have no choice than buying credit insurance.
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