What Does Trade Credit Insurance CostApril 28, 2017 • By Richard Thompson
Investing in a trade credit insurance policy for your business is a very wise decision if you want to avoid issues that may arise from bad debt.
Bad debt can eat up your resources, destroy your cashflow and cripple your business to the point of no return.
So What Is Trade Credit Insurance
Trade Credit Insurance is a 12 month policy which covers your accounts receivables ledger in the event of two triggers;
- Insolvency of your customers which covers, bankruptcy, liquidation and administration etc.
- Non-Payment which covers you in the event your customer either skips and cannot be found or you have a court judgement.
This policy provides very important protection and also comes with a range of other added benefits such as:
Free collections and legal for insured debts:
If you ever need to recover an overdue debt or take legal action against a client who has skipped or not paid. These costs are covered in your insurance policy.
Added security with the banks and financiers:
If you want to take a loan out this policy acts as extra security for you to borrow against. The banks can see that your profits are protected and your accounts receivables will always be paid in full. Giving you access to more credit and better rates.
Strengthened credit management and cash flow:
As part of your trade credit insurance your policy provider will assist you with improving your credit management and cash flow processes. For example they will regularly monitor new and existing debtors for adverse information and credit checks to ensure they can pay for your good and services.
Grow your business with confidence
When your accounts receivables are covered you can be more confident when expanding into new territories or product and service offerings. This is especially true when expanding internationally as you are dealing with new laws and regulations that may leave you vulnerable to nonpayment from new customers.
How Much Does Trade Credit Insurance Cost?
The cost of taking out trade credit insurance will vary depending on many factors. These include:
- The industry you’re business is in
- The history of bad debts you have incurred
- The quality of your current internal credit procedures
- The credit worthiness of your current customers, and
- The amount of cover that is required (your annual revenue that needs to be insured)
However as an indication of what trade credit insurance can cost, most policies range between 0.1 to 0.3 cents in the dollar.
So that would mean a business with annual turnover of $10m per year, will pay a possible average premium of $20k.
Though when taking into account even just the free collection fee’s associated with a trade credit insurance policy, it can often outweigh the cost of your premium. And of course the cost of the policy is a tax deduction as well.
So for businesses who are at risk of bad debts not being paid a trade credit insurance policy makes very smart business sense.
For businesses who don’t want the complete cover of Trade Credit Insurance there is the option of hiring a professional company to assist with your Risk Management. This is where they audit your businesses credit management and help with monitoring of debtors for adverse information and credit checks for new or existing accounts on an annual fee basis
(This is your Plan B if you don’t have a credit insurance policy).
This service also includes the gathering of market intelligence on your debtors through their sources in various industries to help you keep informed about the financial health of your customers.
There will always be risks when doing business but protecting your account receivables and ensuring you never get left out of pocket if a debtor cannot or will not pay their debts is one way to significantly reduce that risk.
For more information about Trade Credit Insurance visit this link.