• Short-term. This will cover repayment terms of a duration of less than one year. This is typically used for the sale of non-capital goods.
• Medium-term. This will cover repayment terms of a duration of one to five years.
• Long-term. This will cover repayment terms of over five years. Coverage is typically limited to seven years.

The number of trade credit insurance companies who offer single-buyer trade credit insurance is limited and is usually available at a premium. Single buyer policies are considered to be high risk and the insurer expects a well-written and developed submission when applying. It is typically the responsibility of the insured to prove the customer’s financial capability, usually by providing financials and/or previous trade history for that customer.

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.

A: It’s often best to speak with a trade credit insurance professional who can evaluate your business situation and make a recommendation based on specialized knowledge of the product. Your business may be suitable for trade credit insurance if any or all of the following general guidelines are true:

• You sell to customers on open credit terms
• Your business has annual sales exceeding $1,000,000 per year
• You have high accounts receivable exposure with a few large accounts
• You’ve experienced bad debt losses in the past
• You prefer not to tap into your own cash reserves in the event of a loss
• Your business needs an edge on the competition
• You want to expand sales and open up brand new markets
• You want access to capital at some of the lowest rates available

Q: I currently have a commercial insurance package for my business. Is Trade Credit Insurance included?

A: No, not typically. Trade Credit Insurance is a highly specialized product and is usually never included with other business insurance you may have. While you may already be covered for fire, theft, and other liability insurance, Trade Credit Insurance compliments these coverages and protects one of your largest unprotected assets - accounts receivable - from loss.

Q. How are premiums calculated?

A: Premiums are based on a multiple of annual sales. Rates are influenced based on prior loss history, risk grade of companies insured, risk sharing coinsurance, and policy deductibles.

Q: We sell on Letter of Credit. How does Trade Credit Insurance help me?

A: Please see following article on the benefits of Trade Credit Insurance versus Letters of Credit by clicking here.

Q: How can a Trade Credit Insurance Policy help our company manage risk?

A: A properly structured Trade Credit Insurance Risk Management program will provide you with analysis and advance notification of financially troubled companies or industries. With this critical information, you’ll be in a position to avoid buyer default situations before being required to submit a claim.

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 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.

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.

Domestic policies cover customer insolvency (Chapter 7 & 13) and protracted default (slow or non-payment losses). They typically cover entire customer portfolios but sometimes include only the largest customer exposures that are named in the policy. Discretionary credit limits are often built into the policy providing the underwriting pen to the policyholder allowing the client to set discretionary credit limits based on their normal due-diligence guidelines. Some qualifiers for DCL coverage include obtaining mercantile reports, bank & trade references, and obtaining financial statements on their credit customers. Sometimes qualifying for DCL coverage is granted simply using previous trade experience.

Export policies cover both insolvency and protracted default and also cover political risk as well. Political risk can involve public events such as natural disasters, political upheaval, acts of war, government intervention, embargo, or currency inconvertibility. With an export policy, letters of credit can be eliminated completely saving expense and time associated with these laborious documents.

Global or Multinational policies cover all the all the same events found in both Domestic & Export policies but are specifically designed for corporations that have a global presence and maintain subsidiaries around the world. The terms and conditions of the policy can be standardized for each location or customized based on specific use. Global or Multinational policies can be written in multiple languages and support different currency options.

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.

When a company’s accounts receivable portfolio is insured with a trade credit insurance company, the insurer establishes credit limits on key customer accounts based on the most current proprietary financial information available. Risk analysts evaluate this data and determine credit limits based on the risk grade of the buyers, and often times when a positive risk grade is determined, credit limits can be set at higher levels than the credit limits previously set by the supplier. The difference in these credit limits is an opportunity for policyholders to sell more products and services to these buyers, instantly increasing sales revenue without taking on additional risk. Companies that have been too credit restrictive previously trying to cap their exposure can now enjoy higher credit limits and sell more to existing customers with confidence.

For companies that export to other countries, sales expansion opportunities become even more apparent. With a trade credit insurance policy, not only can exporters sell into new international markets that may have been too risky in the past, they can also completely eliminate the need of using Letters of Credit and sell on open terms to international buyers. This benefit of trade credit insurance allows companies to win more business from competitors who still use LC’s which are expensive, time consuming, and not the preferred choice for many international buyers.

Sales Expansion Opportunity Example

Credit Limit Established by Internal Credit Department: $500,000
Credit Limit Established by Credit Insurance Company: $750,000
# of Turnovers Per Year: 8
Revenue Increase: $2,000,000
Gross Profit Margin 7%
Impact on Sales Expansion: $140,000

The net impact here is $140,000 in gross profit on this one account due to a higher credit limit set by the insurance carrier.

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.

“I’m not worried about our major accounts, we’ve been doing business with these customers for years.”

“Our key buyers never miss a beat and always pay within terms, infact, we have great relationships with all of them.”

“If any of my top customers filed bankruptcy tomorrow, it would hurt not only my business, but every one of my competitors businesses as well. That’s the only insurance I need.”

While I can appreciate the confidence that financial executives have in their customers’ ability to pay their trade obligations, credit insurance professionals see an entirely different story. Nationally and around the world, businesses of all shapes and sizes are experiencing pressure from many sources - shrinking margins, higher operating costs, stiff competition, and poor collection recovery on their own receivables, to name a few. Any one of these conditions can develop into significant cash flow problems for a business causing that “perfect trading relationship” to fail unexpectedly. The fact is, a company’s ability to pay their trade obligations has very little to do with how large they are or how long a trading relationship has been established. Today’s economic and financial pressures can take down even the largest 800lb gorilla - and any supplier without protection on their accounts receivable could easily experience business interruption or outright failure, particularly in highly concentrated situations. Today, credit insurance professionals see business defaults more frequently as evidenced by the high volume of claims paid to policyholders.

Credit insurance companies protect their clients by maintaining current trading histories on companies worldwide, in real time, identifying which trading partners are currently late paying their suppliers. This critical business intelligence is updated monthly and provides an early warning system to suppliers worldwide. Due to the accuracy and frequency of the information reported, credit insurance companies are able to analyze trends, and identify the buyer(s) that have just stopped paying many of their vendors. Even if these defaulting companies continue to pay a handful of suppliers, history shows that they’ll probably stop paying all their vendors in the near term.

How valuable would this information be to the company that believes to have a stellar trading history with a key buyer but has no clue that the customer just stopped paying 20 of their other suppliers? Priceless - especially when the supplier realizes that they are probably next in line. Partnering with a reputable trade credit insurance company that has access to critical buyer information can help steer a business away from such financial exposure and be the safety net should a major loss occur out of nowhere. This kind of business intelligence combined with credit insurance protection makes smart business sense in today’s economic times.

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.

Available Financing Before a Trade Credit Insurance Policy:

Sales: $30,000,000
Domestic Receivables: $2,500,000
Export Receivables: $1,000,000
Domestic Advance Rate: 70%
Export Advance Rate: 0%
Maximum Borrowing Allowed: $1,750,000

If in this example, this company purchases an $80,000 trade credit insurance policy, the bank will increase the domestic advance rate from 70% to 90% and increase the export advance rate from 0% to 90% as follows:

Sales: $30,000,000
Domestic Receivables: $2,500,000
Export Receivables: $1,000,000
Domestic Advance Rate: 90%
Export Advance Rate: 90%
Maximum Borrowing Allowed: $3,150,000

The net effect here is an additional $1,400,000 in available capital at a cost of just $80,000 in premium.

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.

Despite these risks, some companies unknowingly avoid the issue altogether assuming that they’ll deal with the aftermath once such an event occurs. Other companies plan ahead and choose to absorb the risk themselves by self-insuring and setting bad-debt reserves at extraordinary high levels in the event the 800 lb monster comes crashing down on them unexpectedly Truth be told, in high concentration situations, it doesn’t make accounting sense to set reserves at a level in line with accounts receivable. Also, it isn’t necessary to absorb these losses especially when capital allocated for bad-debt reserves could be reinvested into other areas of the business. Many financial executives are beginning to see the benefits of trade credit insurance as a cost effective solution to reduce high concentrations of risk, free up bad-debt reserve capital, and protect the bottom line from catastrophic losses. Companies with a trade credit insurance policy also have the unique advantage of higher underwriting limits for qualified accounts making it easier to sell more aggressively to existing customers and expand into markets that might have been too risky in the past.

In recent years, premiums for trade credit insurance have come down considerably and are typically priced at a fraction of one percent of annual sales, depending on the risk grades of companies insured, credit lines requested, sales volume, risk sharing coinsurance, and policy deductibles.

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.