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Commercial credit insurance covers debt owed to a business by another business for products or services. Typically there are two numbers that are important under a commercial credit insurance policy — the retention amount and the insurance limit. The retention amount is the amount of loss from bad debts that the insured firm is responsible to pay before the insurance policy’s coverage begins. Amounts of debt not paid over the retention amount are covered by the commercial credit insurance policy up to the policy’s limit. Commercial credit insurance does not generally cover unpaid debts by consumers — rather, it only applies to business-to-business debt.
Commercial credit insurance policies do not generally cover unpaid business debts by consumers at the retail level — rather policies only apply to business-to-business debt. For example, a manufacturing firm who contracts with a distributor on a large-scale products agreement and extends a line of credit to that distributor — i.e., allows that distributor to pay back the debt owed under the contract at a later date — may have that particular debt covered by commercial credit insurance policy. Conversely, a retail store selling products to individual consumers on credit will not typically have their consumer debt covered under such a policy.
The retention amount on a commercial credit insurance policy is the minimum amount of debt that may be defaulted — i.e., not paid back — before the insurance coverage kicks in. All unpaid debt above this total will be covered under the insurance policy up to the coverage limit. So, taking an example of a policy that has a $100,000 US Dollars (USD) retention rate and a $500,000 (USD) limit, all bad debts incurred up to that $100,000 (USD) retention rate would be the responsibility of the policy holder. However, any amount of debt on which the company’s debtors default above that amount and up to a total of $500,000 (USD) would be covered by a commercial credit insurance policy.
There are other benefits to commercial credit insurance that are common within policies. Given the fact that companies can feel secure that a certain proportion of business debt is covered even in the event of default, the business will be able to extend more credit to companies with which they do business. This allows the company to seek new opportunities for revenue that would otherwise be too risky. Further, commercial credit insurance companies often provide collection services for clients’ debts.
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