Understanding the importance of Trade Credit insurance: Q&A with Howden experts
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By Jack Durrant and Andrew Smith - Client Director
In this article, we explore what “Trade Credit” is, and why it’s becoming increasingly important for businesses to consider a credit insurance policy. Jack Durrant, Associate Director, spoke with Andrew Smith, a Client Director in the Trade Credit team, to get a better understanding of this topic.
What is Trade Credit, and what does it do?
Trade credit is a type of insurance that covers a business when they trade with other businesses on credit terms. When a business offers its goods or services to another business they agree on a payment period, which could be 30, 60 or even 120 days.
However, there is always a risk involved, as the other business may go out of business (bust, bankrupt, liquidation etc.) before they are able to make the payment. This is where credit insurance comes in, as it would pay out what is owed if the customer goes bankrupt or is unable to pay, mitigating the loss to your business.
Why might customers not have purchased this product before?
Customers may not have purchased credit insurance before due to the lack of awareness or a false impression that it is expensive. Some businesses may also believe that by working only with blue-chip companies, there is less chance these will face bankruptcy. However, it’s important to note that no-one is immune to insolvency, especially in the current economic climate.
Why is Trade Credit becoming more important?
Trade credit is becoming increasingly important this year due to the high insolvency rates which are 30-40 percent higher than pre-pandemic levels. Businesses want to protect themselves and ensure that they can safely trade with other businesses, even those that may be struggling. Trade Credit insurance provides an added layer of security, ensuing that businesses can get paid even in the worst-case scenario.
Are there any common pitfalls to be aware of for Trade Credit?
One common pitfall with Trade Credit is the risk of unstable customers. Insurers may decline to provide coverage if they’re not comfortable with the risk associated with a particular customer base. That is not to say that insurers will only cover good risks, but when there are obvious and significant issues, they may decline coverage.
What steps should businesses take to obtain cover?
To obtain Trade Credit insurance, businesses should seek experts in this field. By consulting a broker such as Aston Lark, businesses can ensure that their payment terms and operational processes are clearly understood and evaluated.
The next step involves the creation of a proposal that is then sent to the insurer market for consideration. Within a timeframe of seven to ten days, the market will provide terms that the insurance provider will then compile into a comprehensive report. This report is then presented to the client who can make an informed decision based on the terms and conditions offered. The broker will then guide the client through the report, ensuring that all the terms and conditions are clearly understood.
In conclusion, Trade Credit insurance is an important consideration for businesses that trade with other businesses on credit terms. It provides added security and peace of mind, particularly in the current economic climate. While there are some pitfalls to be aware of, such as unstable customers, the benefits of credit insurance far outweigh the risks. If you’re considering Trade Credit insurance, it’s important to consult with a reputable broker to ensure you get the right coverage for your business.