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Smart Business spoke with Altman about trade credit insurance, what it covers and how it can be used to grow a business. Any company that sells good or services could use this insurance. While some industries — mining, energy, metals and automotive, for example — are ideal candidates, given our current economy, for best trade credit insurance company insurance, the type of best trade credit insurance company and sales volume are less relevant than a specific industry or buyer base.

Companies in highly cyclical industries will find it prudent to insure their accounts receivable. With respect to circumstance, highly leveraged companies with tighter cash flows should consider credit insurance best trade credit insurance company well. A general rule of thumb is companies that have receivables of a magnitude that nonpayment could impair their ability to service their debt or cover payroll should be best trade credit insurance company. It could be too late or too costly if a company waits for the industry to deteriorate before insuring.

In those cases, it can be tough to get approved, or there best trade credit insurance company be higher-than-usual rates because of the inflated risk.

What policy provisions should businesses consider or be ready to discuss with their broker when negotiating credit insurance? Pay specific attention to reps and warranties, exclusions and the length of the waiting periods. The insured will want the fewest reps and warranties and shortest claim times after a default occurs.

For example, sanctioned language that says if the U. Businesses considering insuring their accounts receivable should expect their insurance broker to understand their business and not just have insurance product expertise. In addition to mitigating risks to accounts receivables, savvy companies have used credit insurance to grow their businesses.

They use it to increase domestic credit lines, offer extended terms to clients and explore new geographies. In other words, they use it to proactively make their business larger and stronger in a manner consistent with their risk tolerances. Consider one growth-minded Western Pennsylvania company that put this coverage in place. With help from the insurer identifying which prospects had the financial wherewithal to pay invoices, they generated enough incremental net sales to cover the policy premium within a month.

Rather, they should be opportunistic and grow their business through strategic use of trade credit insurance. In what situations does it make sense to have a trade credit insurance policy? Why is credit insurance a good investment?

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Trade credit insurance, business credit insurance , export credit insurance , or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default , insolvency or bankruptcy.

This insurance product is a type of property and casualty insurance , and should not be confused with such products as credit life or credit disability insurance , which individuals obtain to protect against the risk of loss of income needed to pay debts.

Trade credit insurance can include a component of political risk insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc.

This points to the major role trade credit insurance plays in facilitating international trade. Trade credit is offered by vendors to their customers as an alternative to prepayment or cash on delivery terms, providing time for the customer to generate income from sales to pay for the product or service.

This requires the vendor to assume non-payment risk. In a local or domestic situation as well as in an export transaction, the risk increases when laws, customs communications and customer's reputation are not fully understood. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale. The account receivable is like a loan and represents capital invested, and often borrowed, by the vendor.

But this is not a secure asset until it is paid. If the customer's debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as collateral by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more product. Trade credit insurance is, therefore, a trade finance tool.

Trade credit insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. The product is not available to individuals. The cost premium for this is usually charged monthly, and are calculated as a percentage of sales for that month or as a percentage of all outstanding receivables.

Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy.

Policy holders must apply a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate reflects the average credit risk of the insured portfolio of buyers. In addition, credit insurance can also cover single transactions or trade with only one buyer.

Trade credit insurance was born at the end of the nineteenth century, but it was mostly developed in Western Europe between the First and Second World Wars. Several companies were founded in many countries; some of them also managed the political risks of export on behalf of their state.

Many variations of trade credit insurance have evolved ranging from coverage that can be canceled or reduced at an insurers discretion, to coverage that cannot be canceled or reduced by the insurer during the policy period. Other programs may allow the policy holder to act as the underwriter. While trade credit insurance is often mostly known for protecting foreign or export accounts receivable, there has always been a large segment of the market that uses Trade Credit Insurance for domestic accounts receivable protection as well.

Domestic trade credit insurance provides companies with the protection they need as their customer base consolidates creating larger receivables to fewer customers. This further creates a larger exposure and greater risk if a customer does not pay their accounts. The addition of new insurers in this area have increased the availability of domestic cover for companies. Many businesses found that their insurers withdrew trade credit insurance during the lates financial crisis , foreseeing large losses if they continued to underwrite sales to failing businesses.

This led to accusations that the insurers were deepening and prolonging the recession, as businesses could not afford the risk of making sales without the insurance, and therefore contracted in size or had to close.

Insurers countered these criticisms by claiming that they were not the cause of the crisis, but were responding to economic reality and ringing the alarm bells.

However, this was considered a failure, as the take-up was very low. From Wikipedia, the free encyclopedia. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources.

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