What is Credit Insurance?
Credit Insurance is a type of insurance that protects the policyholder’s business by covering a range of losses. These losses could include rising unpaid debts that the business is suffering from, which is a credit risk that could lead to bankruptcy. It also provides coverage from non-commercial payment debts. Credit insurance ensures that the policy holder’s capital is protected, smooth cash flow for trade and marketing, enhancement in repayments and loan services and security of earnings in a business.
Credit insurance provides security to extend the business by increasing sales growth with new and existing customers. Since financial protection is extremely important for any business, Credit Insurance essentially protects the policyholder’s business from going bankrupt by covering losses incurred by non-paying customers. In addition to this, Credit Insurance companies also provide credit management support to the policyholder’s business to help them make better financial decisions.
Benefits of Credit Insurance
There are many benefits of having your business insured by a Credit Insurance company. Storkmarket’s instability and all other issues related to finance in business may lead to major financial issues and catastrophes. To avoid these problems and have a stable and smooth business credit insurance may provide these benefits:
1. Grow the business: Credit insurance may help the business holder to grow the market and expand the sale safely to existing customers and also get new risky customers. If a business wants to grow and expand, there are a lot of risks associated with expansion. However, Credit Insurance protects your business from these risks.
2. Expanding the market at an international level: Stockmarket’s rise and fall, export risks and other problems related to growth decisions are supported by secure financial terms. Credit insurance provides security against all these issues and gives a platform to expand the market at an international level.
3. Better financing terms: Credit insurance is also helpful to bet more secure financing from banks and other resources. It reduces the cost of funds and helps in lending more capital from banks. It also improves the relationship with the lenders and helps in getting an asset-based loan from lenders.
4. Protection against loses and non-payments: credit insurance helps the business holder from any catastrophic loss. In this case, the unpaid bills get paid via the claim process. The credit insurance company will help you cover the losses of a non-paying customer even if you decide to pursue legal action against the customer. The company will then recover the amount of money after the legal case has been settled.
5. Growth of Sales and Profits: credit insurance offsets the cost policy over many times. It increases the company’s sales and profit without any risk factor.
6. Lower the future risks of bankruptcy: Business is not only being protected from potential bankruptcy in the future, but the insurance company will also be taking special care to guide your business in terms of managing its expenses.
In addition to this, people who are interested in either sponsoring or investing in the policyholder’s business will be encouraged when they find out that the business has been insured. Thus, making credit insurance an extremely favorable choice for business holders.
Types of Credit Insurance
There are many different types of Credit Insurance, some of them include:
- Critical Customer Coverage
- Export Credit Insurance
- Whole Turnover Coverage
- Specific risk Coverage
1. Critical Customer Coverage
Some customers are especially problematic in terms of paying their dues. Critical Customer Coverage is a type of insurance that is only for these customers. This type of insurance essentially provides insurance cover for a certain number of customers (usually ten customers is the limit) who either have a poor record of not paying their dues or are threatened by bankruptcy. Also, these customers might also be important customers for the business, which is why the policyholder feels that they need to be insured by the business itself.
2. Export Credit Insurance
Export Credit Insurance is an extremely important type of insurance, especially for businesses that trade overseas. This is because it provides insurance against customers residing overseas who have not paid their dues. In addition to this, Export Credit Insurance also provides coverage against extra risks that can potentially occur while trading overseas. These risks could include political instability, Social instability, Economic risks, and various trade sanctions imposed by the government. Other issues that this type of insurance covers include currency issues (i.e., a shortage of foreign currency in the country that the policyholder’s business trades with) and various insolvencies.
3. Whole Turnover Coverage
This is perhaps the most simple type of Credit Insurance for your business since it is covered for the whole business. The business and the insurance company agree on a certain amount of acceptable credit that can be put forward by the business in advance. After the range of credit is settled, the premium is arranged according to the annual turnover of the business.
4. Specific risk Coverage
In this type of Insurance coverage, the coverage policies allow the business to have insurance against a specific customer. This means that the customer or a particular contract is of great value to the business. The premium, in this case, is decided according to the value of the contract or the profit the business earns through that customer throughout the policy.
What is not covered by Insurance?
Credit insurance doesn’t cover any ambiguous trading links. If the direct link for trade is not present then it refuses to repay or compensate for the debts. Other than this any outstanding trade debt is also not covered by credit insurance.
When should companies buy trade credit insurance?
Credit insurance provides security for bad times, and cover-ups the loses at the right time. It is suggested that when companies are in good condition and getting the profits, get credit insurance so that it can help the company when they had a tough time near the future.
Credit insurance around the globe
Credit insurance around the globe is estimating about $8 billion in written premiums. In different continents estimating insurance is different as in the USA, the ratio is US$ 1 billion, Asia-Pacific has US$2, Europe leads US$ 4 billion and in other areas almost US$ 1 billion.
Credit insurance is the best plan to grow the business and manage the unexpected losses in a business related to trade and financing. Credit insurance is security that may help the business in many different ways.