Trade credit insurance (TCI) is a method for protecting a business 𒅌against its commercial customers’ inability to pay for products or services, whether because of bankruptcy, insolvency, or political upheaval in countries where the trade partner operates.

TCI—sometimes referred to as accounts receivable insurance, debtor insurance, or export credit insurance—therefore helps businesses protect their capital and stabilize cash flows. It can also help them secure better financing terms from banks, which have the confidence that their customers’ 澳洲幸运5开奖号码历史查询:accounts receivable will be repaid.

What Is Trade Credit Insurance (TCI)?

Many commercial buyers request credit in order to make large purchases of goods or services, but lending to those customers puts a supplier at risk that it won’t be repaid. If, for example, the customer files for bankruptcy, the creditor often receives only a portion of what i💦🦂t was owed or nothing at all. That’s especially true for 澳洲幸运5开奖号码历史查询:unsecured debts꧂, wherein the creditor doesn’t have collateral backing up the 🅷loan. 

TCI mitigates that risk by compensating policyholders for the unpaid debt up to the applicable coverage limits. One of the advantages of TCI is that companies can more confidently extend credit to new or existing customers, secure in the knowledge that they’ll be paid back regardless of the customer's financial position. Therefore, insurance can help companies grow their business without assuming undue risk. 

The leading providers of TCI include carriers such as AIG, Zurich Insurance Group, Chubb, Coface, Allianz Trade, and Atradius. The 澳洲幸运5开奖号码历史查询:Export-Import Bank of the United ꦑStates (EXIM), the country’s official export credit agency, also provides credit insurance that protects foreign accounts receivable against insolvency and political risk. Businesses that are insured through EXIM receive 85% to 95% of the invoice amount should the buyer fail to pay.

How Trade Credit Insurance Works

As with any insurance product, the cost reflects the projected risk that the policyholder poses to the insurer. 澳洲幸运5开奖号码历史查询:When evaluating a business’s risk, insurers look at a variety of criteria, such as the 澳洲幸运5开奖号码历史查询:volume of trades a client engages in, the 澳洲幸运5开奖号码历史查询:creditworthiness of its buyers, the industry in which it operates, and the repayment terms to which buyers have agreed. Typically, coverage costs less than 1% of the insured sales volume, according to Meridian Finance Group, a specialty insurance brokerage.

Businesses can often scale their insurance coverage to fit their budget and 澳洲幸运5开奖号码历史查询:risk profile. For example, they may have the option to cover one particular client—especially if it’s a large or particularly risky account—or a select number of clients. Some policies also provide secondary coverage that only kicks in when the primary policy fails to cover the full amount of a ⛦claim.

Based on the financial strength of a client’s covered trade partners, insurance providers typically assign each one a specific credit limit. Shou༺ld the buyer fail to pay for goods or services, the insurer will only cover losses up to that indemnity ceiling. 

Though some carriers include nonpayment due to trade embargoes or other government-related events in their TCI coverage, other insurers offer a separate product known as 澳洲幸运5开奖号码历史查询:political risk insurance. Such protection can be esp𒁃ecially important for firms that operate in tradit🐼ionally unstable regions, including multinational corporations and large hospitality chains.

Advantages of TCI

For some companies, the ability to offer generous credit terms 𒀰to buyers can attract larger buyers or open the door to possible expansion into new geographic markets. TCI generally makes businesses more comfortable extending credit because the risk of default is significantly mitigated. In industries where most of the major competitors already carry TCI, having a loss-mitigation strategy can be a necessity just to stay competitive.

Offering greater credit limits to one’s buyers also helps companies generate 澳洲幸运5开奖号码历史查询:economies of scale.ඣ Because customers can buy larger quantitiesꦆ, a company may find itself purchasing larger amounts from its own suppliers, creating the ability to negotiate better pricing.

Alternatives to TCI

TCI isn’t the only option on the table for companies worried about lost receivables. Here are three other possible strate🐷gies.

Self-insurance

One alternative is to 澳洲幸运5开奖号码历史查询:self-insure, which means the business creates its own reserve fund specifically designed to cover losses from unpaid accounts. The downside to this strategy is that a company may hav🦂e to set aside a considerable amount of capital for loss prevention instead of using that money to grow the business.

Third-party Factors

Another alternative companies have is to sell their receivable accounts to a third party known as a factor, which then attempts to collect the receivables itself. However, a factor typically purchases the right to those receivables at a considerable discount—usually 70% to 90% of the invoiced amount. The creditor may receive a larger percentage if the factor manages to collect the full debt, but it still has to pay a substantiaꦐl fee for the factor’s services.

Buyer’s Letter of Credit

Finally, companies that do business overseas can obtain a 澳洲幸运5开奖号码历史查询:letter of credit from the buyer. Essentially, it’s a guarantee from the purchasing company’s bank that the seller will be paid in full by a specific date. One of the drawbacks is that these can only be obtained and paid for by the buyer, which may be reluctant to pay the transaction fee amount for the bank’s guarantee. What’s more, the letter of credit only pertains to a single buyer, putting the onus on the supplier to protect its other receivables.

Growth of TCI Market

According to a 2021 report by Allied Market Research, the adoption of TCI accelerated during the economic downturn of 2020, which served as a reminder of the potential for market disruption and lost receivable revenues. The global market for TCI reached $9.39 billion in 2019 and is expected to reach $18.14 billion by 2027, according to the research firm’s projections. That represents a compounded annual growth rate of 8.6%.