Welp MagazineTrade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.
Why do you need traders insurance?
The process of selling products on credit to a buyer in the importing country involves a certain level of risk: the buyer in the importing country could fail to pay the invoice. If that happens, the seller in the exporter’s country will not receive the payment, the cost of the resultant loss of profits and loss of business reputation, tedious and costly investigation of the buyer, and in the case of a foreign buyer, the costs of recovering the debt or bringing legal action.
Sellers concerned about buyer credit risk may protect their accounts receivable, by inputting a clause in their commercial terms, such as a credit insurance.
In some cases, the credit protection clause will state that the buyer will be required to take out a loan or any other form of funding that will serve as security for the seller. In this type of credit insurance, the seller is merely a third party beneficiary of the policy and is not a direct beneficiary of the insurance policy.
In some cases, the credit protection clause may state that the buyer is required to take out any form of funding, whether it is a loan or any other form of funding that will serve as security for the seller. In this type of credit insurance, the seller is a direct beneficiary of the policy.
In the case of providing credit protection as a direct beneficiary, the seller is not able to secure a policy using their own creditworthiness, as not all insurance companies would want to provide the seller with cover or provide the policy with the necessary coverage. As a result, the seller may indirectly seek out an intermediary or third-party commercial insurance carrier that would then provide cover or policy, and the seller would be the indirect beneficiary of the policy.
The seller is the direct beneficiary of the policy if the credit protection clause states that the seller themselves will provide the credit insurance to the buyer. In these type of credit insurance, the seller is responsible for paying the premium, as opposed to the buyer, and therefore, the seller is able to secure the policy using their credit worthiness. In this scenario, the seller, as the direct beneficiary could supply cover for the buyer using their own financial and insurance facility, which is known as suppression. Suppression is not possible without a certain level of creditworthiness.
What about foreign buyers?
Similar to the case with credit protection, in the event that the seller is a direct beneficiary of the policy, the seller is unable to secure the policy using their own creditworthiness, as not all insurance companies would want to provide cover to the foreign entity. Also, as a foreign entity, it would be too difficult for the seller to secure a policy using their own creditworthiness. As a result, the seller may indirectly seek out an intermediary or third-party commercial insurance carrier that would then provide cover or policy, and the seller would be the indirect beneficiary of the policy.
To secure cover against buyer risk, the seller may ask the buyer to take out any form of funding that will serve as security for the seller and pay the premium. This type of credit insurance that is provided by the buyer to the seller is known as suppression. Suppression is not possible without a certain level of creditworthiness. To protect foreign buyers, a foreign entity can take out the export credit insurance on behalf of the domestic exporter.
In the case of prevention, most foreign buyers would choose to take out insurance to protect themselves from exporting credit risk. That is, they can take out the credit insurance directly from the credit insurance company.
In the event of default, the insurance company would pay its beneficiary, who is the exporter, an amount the insurance premium has paid for. In the event of default, the insurance company would pay the beneficiary, who is the exporter, an amount the insurance premium has paid for. Alternatively, the beneficiary may be the buyer. This case is virtually the same as credit insurance, the seller is the beneficiary of the insurance contract.
You can also get traders insurance through your local banks, they usually offer it for free or at a low cost. However you will find that obtaining the services of any local bank is oftentimes time consuming, may involve filling out numerous documents in order to be accepted for these services and the insurance policies that they offer may not be adequate or suitable for your business needs.
