Credit insurance, also known as trade credit insurance, is a financial product designed to protect businesses against the risk of non-payment by their customers. For a UK audience, understanding credit insurance is crucial for managing financial risk, ensuring cash flow stability, and enabling confident business growth.

Key Aspects of Credit Insurance:

1. Definition:
   • Credit insurance is a type of insurance policy that covers businesses against losses resulting from non-payment of commercial debt. It provides compensation if a customer fails to pay due to insolvency, protracted default, or political risks (in the case of international trade).
2. Types of Credit Insurance:
   • Whole Turnover Policy: Covers all or most of a business’s receivables, providing broad protection across the entire customer base.
   • Key Account Policy: Focuses on specific, high-value accounts or key customers, providing targeted protection.
   • Single Buyer Policy: Covers receivables from a single customer, useful for businesses heavily reliant on one major client.
   • Catastrophic Coverage: Protects against significant losses from major customers or groups of customers, typically with higher deductibles.
3. How It Works:
   • Risk Assessment: The insurer assesses the creditworthiness of the business’s customers and sets credit limits for each.
   • Premium Payment: The business pays a premium, usually calculated as a percentage of the turnover or the insured receivables.
   • Coverage: If a customer fails to pay an invoice within a specified period (e.g., 90 days past due), the business can file a claim with the insurer.
   • Claim Settlement: The insurer compensates the business for the insured portion of the debt, typically up to a set percentage (e.g., 80-90%) after deducting any applicable excess.
4. Benefits:
   • Cash Flow Protection: Ensures businesses have a steady cash flow even if customers default on payments.
   • Risk Management: Provides financial security and reduces the risk of bad debts.
   • Credit Control: Insurers often offer credit management support, including credit checks and ongoing monitoring of customers’ creditworthiness.
   • Confidence in Growth: Allows businesses to expand and offer credit to new customers with confidence, knowing they are protected against non-payment.
   • Enhanced Borrowing Capacity: Can improve a business’s credit profile, making it easier to secure financing or better terms from lenders.
5. Considerations:
   • Cost: Premiums can vary based on the level of coverage, the industry, and the risk profile of the customers.
   • Coverage Limits: Policies may have limits on the maximum amount that can be claimed per customer or in total.
   • Exclusions: Certain types of debts or specific risks (e.g., disputes over goods or services) may not be covered.
   • Compliance: Businesses need to comply with the terms of the policy, such as providing timely information on customer creditworthiness and adhering to credit limits.
6. Example:A UK-based electronics distributor sells to various retailers, some of which are international clients. The distributor takes out a whole turnover credit insurance policy to protect against non-payment.
   • Policy Coverage: The policy covers 90% of the receivables, with an annual premium of 0.5% of the turnover.
   • Risk Assessment: The insurer sets credit limits for each customer based on their creditworthiness.
   • Claim: One of the international retailers files for bankruptcy, leaving a £50,000 unpaid invoice. The distributor files a claim.
   • Settlement: After verifying the claim, the insurer pays 90% of the invoice amount, i.e., £45,000, minus any applicable excess.

Conclusion:

Credit insurance is a valuable tool for UK businesses to manage the risk of non-payment by customers, ensuring financial stability and supporting growth. By providing protection against bad debts and enhancing credit management practices, credit insurance helps businesses maintain a healthy cash flow, expand with confidence, and secure better financing terms. Understanding the different types of policies, benefits, and considerations is essential for businesses to choose the right coverage and leverage the advantages of credit insurance effectively.