Why you should consider trade credit insurance for your company

What is credit insurance?

Trade credit insurance protects companies if customers do not pay what they owe for products or services. Credit insurance is also known as debtor insurance, accounts receivable insurance or export credit insurance. 

Customers might not pay invoices for several reasons, including payment default, bankruptcy or insolvency. If there is any risk of non-payment which will significantly affect company turnover, you should consider applying for trade credit insurance.

Why is credit insurance important?

Data from the ABI suggests that some 14 000 credit insurance policies are taken out each year in the UK alone, with insurers paying companies approximately £4 million (GBP) each week.

Many Suppliers (Exporters) and Buyers (Importers) enter trade agreements with deferred payment terms, sometimes exceeding 120 days. While this is useful for boosting trade, it comes with an increased risk to cash flow.

The Supplier often has costs for manufacturing and logistics, so it needs working capital quickly to cover its expenses. If the Buyer defaults on payment, the Supplier may be unable to pay its bills and could end up with a cash flow problem.

Credit insurance protects Suppliers against the risk of non-payment. The Supplier pays the insurer a fee for the protection, and the insurer will cover the loss if the Buyer doesn't pay. This gives peace of mind to the Supplier and allows it more flexibility in offering the payment terms its Buyers demand. 

According to research by Barclays, late business payments are increasing. As a result, more companies are looking for help from financial institutions that protect against difficulties with collecting payments. 

Credit insurance example

This is an example of a 'single risk cover' credit insurance policy. Other types of credit insurance are listed below:

ABC Supplier Ltd agrees to sell £500 000 (GBP) of clothing to an overseas retailer, XYZ Buyer Ltd, with 90-day payment terms.

ABC Supplier will use XYZ Buyer's payment to cover its manufacturing, material supply and logistics costs.

However, ABC Supplier is concerned that XYZ Buyer might default on payment and cause those manufacturing, logistics and materials invoices to remain unpaid. So ABC Supplier buys trade credit insurance to cover its bills if XYZ Buyer does not pay. 

XYZ Buyer then pays the £500 000 (GBP) within 90 days and all agreements between the parties are concluded. 

Types of credit insurance

Companies can choose from several types of trade credit insurance. All protect against non-payment but some policies may be more suitable for specific companies. Therefore, it's vital to consider the best credit insurance type for your firm.

Some of the common types of credit insurance include the following.

• Single risk cover credit insurance - also known as a 'single buyer policy'. It's designed to protect Suppliers against non-payment from a specific Buyer. If one Buyer represents a large portion of a Supplier's turnover, the financial impact could be severe if that Buyer doesn't pay invoices.
  
  
• Export credit insurance - this protects Suppliers trading with overseas Buyers. International trade carries more risk than domestic trade. Export trade credit insurance covers a Supplier's accounts receivables, so the Supplier will still receive payment on invoices if a Buyer defaults.
  
  
• Excess of loss - this insurance protects companies against losses exceeding a specific limit. Standard credit insurance typically covers a company based on its annual turnover, while an excess of loss policy covers financial losses beyond this amount.
  
  
• Political risk cover - this is designed to protect Suppliers that trade internationally with Buyers in countries with a risk of political disruption or uncertainty. Exporting to hostile or economically unstable regions may disrupt trade or damage its value, so political risk insurance provides financial cover and peace of mind.

Credit insurance post-COVID

The Covid-19 pandemic led to a surge in companies requesting financial protection against losses associated with non-payment. The global trade credit insurance market is estimated to be worth $3 trillion (USD) annually.

With increasing global inflation, renewed Covid-19 outbreaks and tighter financial restrictions, many small- to medium-sized businesses engaged in international trade are at increased risk. Suppliers are often the most vulnerable, given the financial difficulties many would encounter if their Buyers do not pay. 

However, the current volatility of the global economy means providers are looking to avoid lending money in trading conditions they classify as 'high-risk'. As a result, many small firms are less likely to secure credit insurance and some are forced to reassess trading partners or seek alternative protection.

Other than credit insurance, what other options are available to provide Suppliers with financial security?

Alternatives to credit insurance

• Non-recourse invoice factoring - non-recourse invoice factoring companies advance a percentage of an unpaid invoice to Suppliers once goods are shipped, giving them access to liquid capital. The balance - minus any service fees - is transferred once the Buyer settles the invoice. If the Buyer doesn't pay, the invoice factoring company takes the loss, eliminating the risk of non-payment from Buyers.

• Letter of credit - the Buyer's bank provides a Letter of Credit confirming that the Supplier will receive full and timely payment for its goods or services. This removes any non-payment risk as the bank legally commits to the payment terms stipulated in the Letter of Credit.

In conclusion, there are plenty of reasons trade credit insurance can work for companies supplying goods or services to international Buyers. However, trade credit insurance may not always be available, so companies should consider alternatives and vet their Buyers carefully to reduce the risk of payment defaults.

If you are interested in learning more about invoice factoring, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail. 

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About the authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.

Legal information

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Disclaimer: The above article has been prepared on the basis of Stenn's understanding of the subject. It is for information only and doesn't constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.