Trade Credit Insurance
Why It Matters
Trade credit insurance protects businesses against losses arising from customers’ failure to pay invoices due to insolvency, protracted default, or political risk. Understanding trade credit insurance helps clarify how companies manage accounts receivable risk and stabilize cash flow.
Understanding Trade Credit Insurance: A Practical Guide
Many businesses sell goods and services on open account terms (e.g., net 30, net 60, net 90). While extending credit can drive revenue growth, it also exposes the company to the risk that customers fail to pay.
Trade credit insurance exists to protect against that risk.
This guide explains how trade credit insurance works, what it covers, and how it supports working capital management.
What Is Trade Credit Insurance?
Trade credit insurance (also called accounts receivable insurance) is a policy that protects a business against losses when a customer fails to pay an invoice due to:
- Insolvency or bankruptcy
- Protracted default (non-payment over time)
- Political events (for international trade)
The insured is the seller, not the buyer.
What Problem Does Trade Credit Insurance Solve?
Trade credit insurance addresses risks including:
- Large customer bankruptcy
- Slow-paying customers creating cash flow strain
- Concentration risk in major accounts
- Export payment default
- Political disruption affecting foreign buyers
Without protection, unpaid receivables directly impact profitability and liquidity.
Who Typically Needs Trade Credit Insurance?
Trade credit insurance is commonly used by:
- Manufacturers
- Wholesalers and distributors
- Exporters
- Companies with significant accounts receivable exposure
- Businesses with customer concentration risk
- Firms expanding into new markets
It is particularly useful in B2B environments.
How Trade Credit Insurance Works
At a high level:
- A business sells goods or services on credit terms.
- The business purchases trade credit insurance.
- The insurer evaluates and sets credit limits on approved buyers.
- If a covered buyer fails to pay due to insolvency or default, a claim is filed.
- The insurer reimburses a percentage of the unpaid invoice.
Policies typically cover 75%–95% of approved receivables.
Key Coverage Triggers
Trade credit policies generally respond to:
Insolvency
- Bankruptcy filing
- Court-ordered liquidation
- Legal declaration of insolvency
Protracted Default
- Failure to pay after a defined waiting period
- Typically 60–180 days past due
Political Risk (Export Coverage)
- Government action preventing payment
- Currency inconvertibility
- War or civil unrest
- Import/export restrictions
Political risk coverage is especially important in cross-border trade.
Coverage Structure
Trade credit insurance may be structured as:
- Whole turnover policy (covers all receivables)
- Key account policy (covers specific customers)
- Single-buyer policy
- Export-only policy
Whole turnover coverage is most common.
Credit Limit Approval Process
Insurers:
- Evaluate buyer financial strength
- Assign credit limits per customer
- Monitor buyer financial health
- Adjust limits if risk changes
The insured must follow insurer credit guidelines.
What Trade Credit Insurance Typically Does Not Cover
Common exclusions include:
- Disputed invoices
- Performance-related disputes
- Non-compliance with contract terms
- Failure to follow credit procedures
- Known financial distress prior to shipment
- Currency fluctuations (unless political risk endorsed)
Proper documentation and compliance are critical.
What Affects the Cost of Trade Credit Insurance?
Premiums are influenced by:
- Industry sector
- Customer concentration
- Historical bad debt losses
- Geographic exposure
- Total insured turnover
- Payment terms offered
Premiums are often expressed as a small percentage of insured turnover.
Benefits Beyond Loss Reimbursement
Trade credit insurance may provide:
- Ongoing buyer credit monitoring
- Improved access to financing
- Enhanced borrowing capacity
- Lower cost of capital
- Sales expansion confidence
Lenders may advance more against insured receivables.
Trade Credit Insurance vs Factoring
| Feature | Trade Credit Insurance | Factoring |
|---|---|---|
| Protects Against Non-Payment | Yes | |
| Transfers Ownership of Receivables | No | |
| Improves Borrowing Base | Yes | |
| Immediate Cash | No | |
| Risk Retained by Seller | Partial |
Trade credit insurance protects receivables; factoring converts them to immediate cash.
Smart Questions to Ask a Broker
- Is this whole turnover or key account coverage?
- What percentage of loss is covered?
- What is the waiting period for default?
- How are credit limits established?
- Does coverage include political risk?
- What reporting obligations apply?
Understanding compliance obligations is essential.
When Trade Credit Insurance Makes Sense — and When It Might Not
Trade credit insurance makes sense if:
- Accounts receivable represent material balance sheet exposure
- Customer concentration risk exists
- You operate internationally
- Expansion into new markets is planned
- Financing depends on receivables quality
It may be less necessary if:
- All sales are prepaid
- Customer base is highly diversified and low risk
- Loss exposure is minimal
For many B2B companies, trade credit insurance supports growth and financial stability.
Cheat Sheet
| Feature | Trade Credit Insurance |
|---|---|
| Coverage Focus | Accounts receivable |
| Covers Insolvency | Yes |
| Covers Protracted Default | Yes |
| Covers Political Risk | Optional |
| % of Loss Reimbursed | 75–95% |
| Improves Financing Access | Yes |
| Used by Exporters | Yes |
Key Takeaway
Trade credit insurance protects businesses against customer non-payment due to insolvency or default. Beyond reimbursement, it enhances credit management, supports expansion, and strengthens borrowing capacity, making it a strategic financial risk management tool.