Trade Credit Insurance: Common Exclusions
Every trade credit insurance policy has exclusions describing what it will and will not pay. Although this post will not attempt to identify them all, it will identify a few of the more common exclusions found in most policies. Some typical exclusions include:
Trade Disputes. Quality, fulfillment, and performance disagreements between a seller and buyer are not covered until a judgment is awarded in favor of the insured. Once a winning judgment is produced to the insurer, the claim qualifies for payment.
Maximum Collection Period. If a buyer has outstanding invoices that are overdue beyond the agreed collection period, only those invoices qualify for payment. Any new invoices from that buyer would not be covered.
Maximum Terms of Sale. A transaction that occurs outside of the normal terms of sale would not qualify for payment. For example, if a buyer requests an exception to the normal collection period indicated in the policy, ie. net 30, net 60, this would not be covered.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact Jack Trama directly by clicking here.
Trade Credit Insurance: Common Misconceptions
There are many significant advantages of trade credit insurance. Some major benefits include cash flow protection, opportunities for sales expansion, enhanced financing availability, asset securitization, and direct access to expert credit information on businesses worldwide. While trade credit insurance is an extremely valuable tool for businesses selling on open terms, there are a few misconceptions about the product requiring further clarification.
For one, trade credit insurance does not attempt to replace a company’s internal credit department, rather, it enhances it by providing real time credit information and financial guarantees on the credit decisions made. The relationship between a credit insurer and an internal credit department is a dynamic one. There is an ongoing exchange of credit information and a strong underwriter reliance on the due-diligence capabilities of the insured. Premiums have a direct relationship with how companies perform their own due-diligence when granting credit.
Second, trade credit insurance is not designed to cover small, everyday losses, rather, it is designed to be the safety net used to reimburse the insured for larger, catastrophic losses that would have significant impact to cash flow. If a company experiences losses of $15,000 every year, for example, a deductible would likely be set at $15,000 to be absorbed by the insured as a form of risk sharing. This illustrates the point that a company’s internal credit department plays an important role in the process.
Finally, trade credit insurance is NOT factoring where receivables are purchased at a discount, cash is advanced at high premiums, and customer relationships are managed by the factor. Quite the contrary, trade credit insurance is a risk mitigation management tool that guarantees and secures a company’s accounts receivable from unforeseen loss, allowing the insured to borrow more capital at favorable rates, while leaving full control over customer relationships with the insured.
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact Jack Trama directly by clicking here.