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Trade credit insurance is a type of business insurance coverage that helps to protect the policyholder from losses sustained when a buyer failed to make payments on purchased items. Assuming that the buyer does not dispute the validity of the purchases or the charges, the insurance coverage offsets at least a portion of the unpaid amount that will be settled. Typically, the provider of the trade credit insurance will cover the loss of the client, then begin collection proceedings against the delinquent buyer.
Securing trade credit insurance is important to the financial well-being of just about any type of company. Beyond the obvious benefit of being protected from the potential of lost revenue due to non-payment of outstanding customer invoices, the presence of the business credit insurance sends a clear signal to prospective investors that the company is well organized and sound. From this perspective, trade credit insurance not only helps to reduce payment risk, but also create a more positive company image that helps the company attract investors and increase the flow of cash into the operation.
With the protection provided by trade credit insurance, the insured party also enjoys several other benefits. The company is free to extend credit to more customers, a move that can often attract additional business that helps to expand the client base over time. Often, the business is positioned to offer credit terms that compare favorably with the terms offered by banks and finance companies, an advantage that is highly likely to appeal to prospective customers. Trade credit insurance also makes it possible for the insured company to maintain lower bad-debt reserves, meaning that incoming revenue can be diverted to other areas of the operation, including the settlement of any outstanding debt the company may currently hold.
As with most types of business related insurance coverage, trade credit insurance is not cheap; maintaining the coverage can amount to a significant sum for each year the business is in operation. Depending on the terms of the policy, premiums may be due monthly, quarterly or even annually. For companies that offer high priced items to customers on credit, the insurance coverage provides a great deal of peace of mind and protects the business from possibly incurring a loss that could financially cripple the operation. For that reason, even if only a few claims are filed over the course of many years, the cost of the trade credit insurance is easily offset.