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.
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