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Five important benefits of trade credit insurance

Most businesses insure their property, plant equipment and other assets, yet many don’t insure their largest asset – their debtors ledger. Whether for local or export sales, trade credit insurance can provide a business owner with valuable cover when a client does not pay their dues or becomes insolvent. 


Five key benefits of trade credit insurance are:

1.    Profit preservation. There is no point in making a sale and then not getting paid for it. Unpaid invoices can have a major impact on a business’s profitability and results for the year. Trade credit insurance can help business owners manage risk and protect profitability.

2.     Liquidity and cash flow protection. Bad debt reserves don’t put cash back into your business. A claim payment will inject cash back into your business so you can pay your suppliers. 

3.    Confidence to grow. Many businesses put a limit on open credit terms and credit limits for fear that debtors may not honour large debts. A trade credit insurance policy enables business owners to set higher credit limits (with peace of mind knowing that their business is insured) and and can help them focus on growing their business. 

4.    Improved credit management. Having trade credit insurance improves access to debtor information, which in turn helps finance and credit teams with assessing, monitoring and identifying bad debts. 

5.     Additional security. Many businesses use trade credit insurance in their negotiations with financiers. A secured debtors ledger can be assigned as security to a bank and can assist in further funding negotiations.

Calculating the cost of trade credit insurance

Typically, 90% of your receivables can be covered by trade credit insurance.

Trade credit insurance premiums are based on businesses’ credit sales and typically range between 0.1% to 0.5%. The exact percentage depends on a number of factors, including the level of risk retention the business owner may keep, their industry and their bad debt history.

Most policies also incorporate contributions to costs and services for pre-insolvency support. These services aim to assist  credit teams in collecting overdue debts, so the business owner can concentrate on continuing to grow and manage their business.

A small investment in trade credit insurance can help ensure the business continues to trade with confidence, in the unfortunate event of an unexpected insolvency.

What is good practice?

Given the current economic conditions and the heightened level of trade credit risk (especially in building construction and retail sectors), it is good practice for business owners to ask themselves the following questions, on a regular basis:

  • If your largest client couldn’t pay their debt, what would be the impact?
  • When did you last review the credit worthiness of your top 20 credit risks?
  • How do you assess the credit worthiness of a new or potential client?
  • How do you monitor the credit risk factors of your debtors?
  • What action do you take when an account becomes overdue?
  • What steps have you taken to address changes to government legislation? (such as The Personal Property Securities Act 2009)

“As the Managing Director of NCI Trade Credit Solutions, I have been to many large liquidation creditors meetings. The majority of creditors attending these meetings, who stand to lose a lot of money, have never heard of trade credit insurance. Perhaps the time is right for this to change.” – Kirk Cheesman, Managing Director, NCI Trade Credit Solutions

To learn more about Trade Credit Insurance, contact Kirk on +61 8 8226 4869 or kirk.cheesman@nci.com.au

The content of this article is intended to provide a general guide to the subject matter.

For specialist advice regarding your specific circumstances, please contact the BCR team.

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amy@bcradvisoryblog.com'
BCR team
The BCR Advisory team are a national represented firm with its main office located in Sydney. It is a boutique corporate advisory, recovery and insolvency firm that specialise in the SME market. The team’s reputation is built on their extensive experience within the industry as well as their fresh and innovative approach to problem solving for distressed business owners. Let us know what you thought about this article by leaving a comment below. Alternatively, you can get in touch with the BCR Advisory through our contact page.

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