Trade Credit Insurance for Small Businesses
What is Trade Credit Insurance in Dubai?
Why Small Businesses Should Have Trade Credit Insurance?
Protection for Losses
Indefinite delays or non-payment of invoices by customers create significant financial strain for small businesses. Trade credit insurance covers the risk of non-payment and prolonged payment delays by customers.
Effective Cashflow Management
Credit insurance enables better cash flow management by mitigating the payment risk. Small businesses can cover their operational costs without adversely affecting their working capital.
Easy Access to Bank Financing
Small businesses typically depend on banks and financial institutions for their capital requirements. As credit insurance covers the risk of accounts receivables, they can easily access bank financing and negotiate for better rates.
Customer Risk Assessment
Many insurance providers offer detailed insights and inputs regarding the creditworthiness of business entities in the marketplace. This is beneficial for small businesses as they can make informed decisions while trading with other players in the industry.
Facilitates Business Growth
Trade credit insurance enables small businesses to acquire more or bigger customers by improving their credit terms. The policy also covers risks associated with international trade, such as political instability and foreign exchange volatility. All these factors can contribute to faster growth and expansion of small businesses.
How Does Trade Credit Insurance Work?
The process starts with submitting an application to the insurer with key details about the company, such as the nature of the business, the profile of customers, the amount of receivables, and the overall risk exposure.
The insurer evaluates the creditworthiness of customers and sets credit limits for each of them. This limit fixes the maximum amount that the insurer is willing to cover for every customer.
Trade credit insurance offers coverage for unpaid invoices due to customer insolvency, protracted default, and political risks. Most policies cover 80-90% of the invoice value.
The premiums are usually calculated as a percentage of the insured turnover (i.e. total sales volume covered by the policy). The premium depends on factors such as the nature of the business, the type of customers, and an assessment of credit risk.
The insurer must be notified within the specified timeframe (along with requisite documents) if a customer fails to make payment.
The insurer evaluates the claims received from the policyholder and pays compensation for the agreed percentage of the loss.
Components of Trade Credit Insurance Policies
Policy Coverage
The coverage amount depends on the amount of trade receivables and the credit profile of customers. Premiums are calculated by the insurer based on the overall credit risk exposure and the insured turnover.
Policy Period
Trade credit insurance policies are typically issued for 12 months and renewed at the expiry of the term
Credit Limits
This limit refers to the maximum coverage offered per customer. The limits are set based on the creditworthiness of each customer.
Indemnity Percentage
This refers to the proportion of the receivables covered by the credit insurance policy. This percentage is usually in the range of 80-90% of the unpaid amount.
Waiting Period
After the customer defaults or the payment seems improbable, the policyholder must wait for a specified period before submitting a claim. This waiting period provides some space for resolution before handing over the matter to the insurer
Deductibles
This is the amount of loss to be absorbed by the policyholder before the insurer pays for the same. Many policies include deductibles to prevent frivolous claims.
Exclusions
The insurer may not cover items such as pre-existing bad debts, non-payment due to breach of contract, loss due to damage of goods, minor claims, etc.
Types of Trade Credit Insurance Policies
Whole Turnover Policy
This policy covers the entire credit portfolio of a business. It is the most comprehensive insurance policy as it covers all credit sales. The whole turnover policy is best suited for businesses that have a significant proportion of credit sales.
Key Customers Policy
This policy insures only the top customers who account for a significant share of the company’s revenues
Single Buyer Policy
This policy protects the business against default by a single customer
Transactional Policy
This type of credit insurance policy provides cover on a transactional basis
What Does Trade Credit Insurance Cover?
- Non-payment of invoices by customers due to bankruptcy or insolvency of buyers
- Protracted defaults or late payment of dues
- Non-payment by global customers due to geopolitical risks, trade restrictions, currency issues, and other events beyond control
What is Not Covered Under Trade Credit Insurance?
- Non-payment by the customer due to legal disputes and any expense incurred to resolve such disputes
- Any amount payable by way of damages or penalty by the customer
- Payment default by private individuals
- Any amount due from a government entity that cannot be declared insolvent
Benefits of Trade Credit Insurance
Protection against unpaid invoices due to customer insolvency and protracted defaults
Credit insurance prevents disruption of cashflows and helps businesses cover their operational costs.
Trade credit insurance coverage facilitates the growth and expansion of small businesses by providing a safety net against bad debts.
Better information about potential customers from the insurers helps a business tap global markets. Reports and insights from the insurers enable informed decision-making.
Small businesses have easy access to bank financing due to lower credit risk.
How to Choose the Right Trade Credit Insurance Policy?
Evaluate the credit risk associated with your business. Analyze the creditworthiness of your customers. Understand your cash flow pattern and its impact on your operations.
Determine the type of coverage suitable for your business. The right insurer has a diverse product portfolio and offers tailor-made policies to cover your specific risks. Decide whether you need domestic or global coverage (or both)
Check the reputation and financial strength of the insurers. Choose an insurance provider with good claims settlement and proven expertise in trade credit insurance.
Compare the credit insurance policies on parameters such as coverage limits, premiums, claims process, and additional benefits.
Read the policy document carefully to understand the terms and conditions. Check the exclusions and understand your obligations before filing a claim.
Do not hesitate to seek professional advice from experts specializing in trade credit insurance to choose the right policy for your business.
Frequently Asked Questions about Trade Credit Insurance
What are the objectives of trade credit insurance?
The primary objective of trade credit insurance is to protect a business against the risk of non-payment or protracted defaults by customers. It ensures that businesses can continue their operations even if major customers fail to make payments.
Who uses trade credit insurance?
Trade credit insurance is primarily used by businesses that sell goods or services on credit and are exposed to the risk of non-payment of invoices. This includes small, medium, and large commercial enterprises.
What is an example of trade credit?
An example of trade credit: a manufacturer orders 1,000 kg of raw material from a supplier and agrees to make the payment within 90 days of receiving the goods. (Here the manufacturer buys the raw material without paying cash upfront).
Can trade credit insurance be used for international trade?
Yes. Trade credit insurance can be used for international trade to protect exporters against the risk of unpaid invoices and indefinite payment delays.
Is trade credit insurance worth it for SMEs in the UAE?
Yes. Payment delays and defaults by customers have a huge impact on the businesses of small and medium enterprises (SMEs). Trade credit insurance prevents cash flow disruptions and preserves the working capital of small businesses. The policy compensates for the risk of non-payment by customers and prevents losses before they occur.
How does trade credit insurance benefit small businesses?
Trade credit insurance is an effective risk management tool for small businesses. The policy covers the risk of bad debts, facilitates easy bank financing, and helps a small business expand its operations without the fear of loss.
Disclaimer: The information presented here is gathered from trusted sources on the Internet. We make every effort to ensure accuracy and reliability, and we encourage readers to cross-check information with official sources and use their discretion when relying on it.