What is credit insurance - Definition and explanation

What is credit insurance
Credit insurance protects your company from non-payment of commercial debt.

The Goal of the credit insurance

Credit insurance protects companies against two risks if a buyer cannot pay : commercial risk and politics risk.

commercial risk insurance

This is represented by non-payment, declared bankruptcy, insolvency or a similar legal status.

Political risk insurance

These could be due to actions or decisions, of a political or administrative nature, which may generate economic, commercial or financial losses.

Political risks could affect the contract or the investment:
◾Events such as civil war, riots, revolution, changes of power or government.
◾Public entity decision: non-compliance with contractual obligations (including non-payment) or an arbitral award, wrongful breach of contract.
◾Political decision-making : embargo, boycott, withdrawal of license, inconvertibility / non-transfer of currency, confiscation, expropriation, nationalisation, dispossession, discrimination …

A credit insurance policy may also cover losses caused by war or civil unrest in the country of your customer or between two or more countries; cancellation or non-renewal of export or import licenses; currency risk etc.

Why subscribe to credit insurance

Responsiveness is a key component of the commercial relationship, during the processing of an orders or to avoid any loss of a market !
If the manager does not have sufficient information to evaluate the resolting risk which is particularly true in specific or internationally markets.
The unprepared face trade practices, breach of his client, political and economic situation, the lack of human resources, risk analysis, technical advice are that the customer risk is too often underestimated !

Example of company without a credit insurance
A company’s profit margin is about 10 percent and one of its customers debt is $10,000.
The company will have to produce additional sales of $100,000 to make up for the lost profits.

Example of a company with a credit insurance
With a credit insurance policy, the company receive 90% of the invoice amount ($90,000 for the insured invoices).

This percentage usually ranges from 75% to 95% of the invoice amount, but may be higher or lower depending on the type of cover that was purchased.

To read more on why use credit insurance ?