Don’t let a customer’s money problems become your problem. 7 questions to check if your business needs Trade Credit insurance.
Do any of your clients:
- Have debtors that represent a substantial asset on their balance sheet?
- Deal on credit terms with their customers?
If they do, would they survive one of their major customers becoming insolvent?
While businesses usually insure their physical assets, they often neglect to insure their non-physical assets, such as debtors. Which is surprising, considering the debtors may well constitute a significant proportion of their current assets.
Trade Credit (or ‘Debtor’) insurance protects businesses against customers (national and international) defaulting or becoming insolvent. It’s often referred to as ‘life insurance for companies’.
In the case of a non-payment, the insurer will typically pay the insured business the money owed (up to the amount covered by their policy), and then take measures to recover the money from the debtor.
And if the debtor becomes insolvent, the insurer will compensate the insured business and then become your buyer’s creditor.
Premiums are based on elements such as:
- the size of the business
- the industry sector it operates in
- any bad debts it’s had in the past
- the size and mix of its customers (including where they’re located)
- the strength of your credit management procedures.
These premiums are calculated as a percentage of the insured amount, and can vary greatly between industries.
For your client to take out a policy, they first need to conduct a risk assessment of their customers, which is usually done in conjunction with the insurer. The insurer is trying to determine the financial health of your client’s debtors and their exposure to risk factors, so the more details the insurer gets about your client and their customers, the more comprehensive the assessment will be (and the more likely your client will get coverage)
To help your client determine whether they’d benefit from Trade Credit insurance, here’s a quick 7-point yes/no checklist for them:
- Do you have the capacity to assess your customers’ exposure to risk? (Yes/No)
- Can you offer competitive credit terms and have confidence you will be paid? (Yes/No)
- Are you confident your largest debtors can pay you on time? (Yes/No)
- Do you have adequate contingencies to deal with late payments or non-payments? (Yes/No)
- Are you confident your key clients aren’t at risk of insolvency? (Yes/No)
- Does your business have the capacity to manage debtors and collect debts as required? (Yes/No)
- Can your business absorb all the risks it’s exposed to and still be profitable? (Yes/No)
If they answer ‘No’ to any of these questions, they should consider Trade Credit insurance.
Staying in business means protecting it from as many risks as you can. And Trade Credit insurance adds another string to your protection bow.
If you’d like to talk to us about how Trade Credit insurance might apply to some of your clients, give us a call on 1300 727 739 or get in touch here via email.