What is credit insurance?
Credit insurance is an insurance policy purchased with the intention of protecting a business against commercial and/or political risk that is beyond the control of your company. It also improves the chances of your profits not being affected or decreased due to other companies (your clients) going bankrupt.
How does it work?
Credit Insurance protects your company against failure of your customers to pay credit debts owed to you. Such situations can arise from insolvency, bankruptcy or simply failing to pay financial obligations, which unfortunately happens more often than one would think or hope for.
When you insure your business against other companies not paying you, you provide leverage for your company to negotiate better credit terms with banks in the form of obtaining more competitive rates since your business will be seen as less risky and protected. It also allows you to extend credit to new customers in order to further grow the business.
Technically, the credit insurer monitors the financial performance of your customers, and then allocates a grade to those customers evaluating how financially healthy they are. This evaluation can become an extensive investigative effort, and based on this risk assessment of your clients, each client is granted a specific limit to which your business with them can be insured. This amount represents the amount you can claim from the insurer should something go wrong. It’s worth mentioning that the limit the insurer places on your client isn’t set in stone and can actually be negotiated with the insurer under most circumstances.
Why would you need Credit Insurance?
There are several benefits to obtaining this type of insurance for your business, this includes:
- Managing trade receivables effectively – as receivables can represent up to a third of total assets of a company’s balance sheet, managing them properly will support your sales expansion
- Enhance customer relationship as credit insurance will allow you to extend your business with more clients
- Delivering comprehensive protection against the risk of bankruptcy
- Improving banking relationships and improving access to finance as your business will be seen as less risky
Choosing the most appropriate Credit Insurance policy can be overwhelming and confusing. That’s why it’s best to have a broker such as Petra Insurance by your side at all times to ensure clarity and proper information is provided to receive the maximum efficiency on the money you spend.
Unfortunately, if you don’t get the right advice, it can become an expensive and an unaffordable policy to your business.