Combatting the Risk That Comes with Clients Paying on Credit
You work hard to provide a great product or service to your clients, right? You ship products to clients, and your clients agree to pay you within a defined period. You say yes. It’s just a part of how you do business. Essentially, you’re letting your clients pay on credit. But, what happens if your clients default on payments or go out of business? Yikes. It wouldn’t be good, would it?!
That’s why it’s so critical you protect your business against outstanding receivables. How? Easy. Trade Credit can help.
A Trade Credit insurance policy can play a critical role in transferring the risk manufacturers, providers of services, or traders face if their buyers don’t make payments or payments are delayed due to unforeseen circumstances.
Some risks covered under Trade Credit insurance are:
- Commercial Risks. The insurance covers both the delayed payment by debtors along with the insolvency.
- Natural and Political Risks. The insurance offers coverage against a wide range of risks like political unrest, floods, cyclones, protracted default on state-owned entities, etc.
Trade Credit is good for any company, but many companies selling goods or providing overseas services feel it’s essential to the health and wealth of their companies. It just makes good sense.
So, how do insurance companies come up with premiums for Trade Credit insurance? Well, insurers consider estimated or projected credit sales for the financial year. They also look at payment terms extended to buyers. A credit limit applies on each buyer. In some cases, the limit can be for the full maximum exposure (total amount of outstanding receivables from buyer) or the limit can be issued for a smaller amount than the maximum exposure depending on the health and financial history of the buyer.
Trade Credit can play a valuable role in covering your business against a client’s insolvency or default. But, one thing you need to know is there are times when an insurer can refuse to settle your claim. A few of those reasons are:
- Wrongful or dishonest acts
- Material inaccuracy with regard to representations made pertaining to outstanding receivables
- Sales made cash on delivery, cash in advance, or with an unconfirmed letter or credit
If the risks of providing payment terms to your buyers are prevalent and peace of mind is your wish, Trade Credit insurance can be a good risk management tool for you. It’s a well-tested risk transfer method that offers great value. It can offer your business enterprise wide protection…not only as a precaution, but also as a valuable tool.
If you have questions about how it could work for your business, please feel free to reach out! I’d be happy to talk with you.
Published on: 02.15.18