As technology continues to advance, more and more options for commerce come into play. Where cash and check used to be the preferred methods for exchanging money, now credit cards and even tap-to-pay solutions are the norm.
In the wake of this, new risks have also emerged that can threaten a business’ financial wellbeing. This is where the concept of trade credit insurance has risen to fill the niche.
What Is Trade Credit?
The term “trade credit” refers to a scenario in which one party gives credit to another to purchase goods or services. Trade credit goes beyond cash because it deals with “conceptual” money—in the same sense, getting a credit card with a $10,000 limit doesn’t mean that you suddenly have $10,000 mailed to your door. That money is conceptual, a credit you can trade when you make a purchase.
The Importance of Trade Credit Insurance
Trade credit insurance, also known as credit insurance or export credit insurance, protects a business’ risk of “bad debt” from customers and catastrophic loss.
In today’s business climate, organizations are expected to extend credit to their customers because it enhances purchasing power and creates opportunities that may haven’t been available otherwise. However, providing a credit option can pose a challenge for many companies because a single late payment or a customer’s inability to pay can dramatically change how profitable a venture is or how cash flow resolves.
Thankfully, businesses can protect themselves using trade credit insurance. This type of coverage removes much of the risk that companies face from parties who don’t pay; instead, accounts receivable can continue on as usual, assured that all compensation owed will be received. Along with providing insurance for a business’ accounts receivable, it also gives businesses a competitive advantage by offering favorable terms domestically and internationally.
Get started today by filling out our Trade Credit Insurance application form!
Credit insurance policies also provide information that helps companies to make sound credit choices. This information supports the credit department in the making of decisions quicker, faster and more efficiently. Credit insurance can also secure better financing options and provide access to more significant funding when the A/R is insured.
How Does Trade Credit Insurance Work?
Trade credit insurance protects businesses against the risk of non-payment by their customers. It can be a useful tool for businesses that extend credit to customers, as it provides protection against the risk of non-payment due to insolvency, bankruptcy, or other reasons.
Here’s how trade credit insurance typically works:
- Business applies for coverage: A business applies for trade credit insurance coverage with an insurance provider. The insurance provider will assess the business’s creditworthiness and determine the level of coverage that can be provided.
- Insurer assesses the risk: The insurer will evaluate the business’s customers and the credit risk associated with each of them. This evaluation is based on a number of factors, such as the customer’s credit history, financial stability, and payment history.
- Policy is issued: If the insurer determines that the risk is acceptable, they will issue a policy to the business. The policy will outline the terms of coverage, including the types of losses that are covered, the maximum amount of coverage available, and any exclusions or limitations.
What Trade Credit Insurance Can Protect Against
Trade credit insurance can help to protect against:
- Non-payment or late payment
- Customer bankruptcy, insolvency or similar legal status
- Nonpayment following an event outside the control of the buyer or seller
In other words, your business can avoid footing the bill for lost products or time spent if a customer on credit decides not to pay, either intentionally or accidentally.
Work With The Trade Credit Professionals To Grow Your Business
If you’re a business looking to grow and improve your cash flow while minimizing credit risk, work with trade credit professionals at MFE Insurance. Contact a trade credit professional today online or over the phone at 213-266-7990 to discuss how they can help your business grow and thrive.
Get started today by filling out our Trade Credit Insurance application form!
