Every kind of business prefers cash sales, but it is not always probable in this competitive digital era. At times, sellers need to provide sales on credit to maintain customers. Trade based on credit terms opens a new route of doing business with customers.
If customers get some time to pay cash they make purchases immediately. Credit terms, even reveal to the customers that sellers have confidence and trust in them of repaying on-time as agreed. This even makes the buyer do repeat purchases and become a loyal customer.
Trade credit also has its risk like not receiving cash on sales instantly, which can impact their cash flow. A seller has to finance the buyer’s receivable amount until payment is made [only extend credit if your business is financially stable].
Extending credit needs monitoring accounts receivables to ensure that their customers are making payments according to the credit terms. Trade credit extension increases bad debt risks because of customers’ delayed or failed payment or insolvency or bankruptcy. This will eventually make the seller write unpaid receivables as a loss. In this situation, trade credit insurance is helpful.
What is the trade credit policy?
Rather than handling unpaid customer invoices and watching their accounts marked as default can damage the financial health of your business. Therefore purchase trade credit policy to mitigate the bad debt financial risks. Trade credit policy was designed to protect businesses against financial losses because of customer default, bankruptcy, and unpaid account receivables.
Small businesses assume it to be expensive and unaffordable but it is not so. If done correctly, trade credit coverage is an investment.
How does trade credit coverage work?
Special agencies like Niche Trade Credit offers trade credit coverage. If the insurer agrees to work with you, then a unique credit limit will be structured for your potential customer. The insurer reviews your potential customer’s order book, previous defaults, cashflow, current trading environment, and niche.
You can trade with customers within the underlined credit limit the insurer has set. You will not have to refer to the insurer all across the year. If your customer fails or busts, the insurer pays the specified percentage of what your customer owed.
- Generally, 80% of loss value suffered is paid out by the insurer.
- Premiums need to be paid annually, which is a percentage of your company’s turnover.
- Insurance can be purchased for all your customers or just some main customers.
What is the cost of trade credit coverage?
It depends on the business, sales volume, and overall bad debt risks of accounts receivables. Many insurance companies have standard rates based on risk levels. Businesses can control their trade credit coverage premiums by choosing clients they need coverage from and even choose an affordable insurance provider.
You can choose the due date limits before policy kicks-in as well as choose a percentage of unpaid invoices the insurer will cover. These choices can lower the trade credit policy’s buying cost.
It is crucial to work with brokers that have experience and knowledge about trade credit insurance!