Trade Credit Insurance

To facilitate trade between companies, a seller may offer deferred payment terms to its buyers. By offering beneficial payment conditions, the seller provides working capital to its buyers, allowing them to start processing or selling the goods before the payment is due. Although this is a widely accepted trade practice, it poses a risk to the seller as the buyer may fail to pay.

Currently in Kenya, the respective credit risk of buyer non-payment is typically assumed by the seller, if not covered by a letter of credit or collateral security or mitigated by means of advance payment.

Trade Credit Insurance is a very effective instrument that not only transfers the risk inherent in trade receivables, but also outsources the credit risk management process to a specialized partner, taking advantage of the necessary expertise and resources to effectively manage the portfolio of buyers.

Available Cover Options

Three options available under Trade Credit Insurance

  1. Whole Turnover Insurance – Insurance on the entire debtor book.
  2. Top Tier cover – Insurance on the top buyers of the company. This is based on the “Pareto Principle” that 20% of debtors account for 80% of turnover.
  3. Single debtor cover – Insurance on a single debtor. In-depth assessment of the proposed buyer vis a vis the company operations is crucial to ensure no adverse selection against the insurer.

Benefits of Trade Credit Insurance

  1. Safer business growth - Trade credit insurance gives its insured the confidence to develop their business and to explore new markets. Whether increasing credit line with existing customers, or extending credit terms to new clients, trade receivable protection provides a simple and efficient way to do so with security and peace of mind. Trade Credit insurance would enable a company to relax existing credit conditions bringing about competitiveness and eventually more trade.
  2. Increased borrowing - With Trade credit insurance, businesses can gain access to better financing options as lenders are generally sensitive to the additional security that it provides. In some cases, lenders will even require trade credit insurance in place before agreeing to give a loan. Additionally, insured trade receivables can be pledged as collateral and assigned to the bank in order to achieve better borrowing conditions.
  3. Protecting the Balance Sheet - Trade Credit Insurance serves the key role of protecting the company against bad debts. This has the ultimate effect of enhancing the bottom line as the losses emanating from bad debts written off are minimized. The credit risk, when borne by a non-specialized company constitutes a substantial risk to its balance sheet: trade receivables represent often up to 30% of the total assets of the non-financial companies and non-payment can therefore have drastic effects. Trade Credit Insurance protects against potential bad debt losses, which would affect the profit and financial strength of the seller/ insured. The policy holder can then significantly reduce bad debt reserves, thus improving earnings, shareholder equity and financial ratios.
  4. Customer information - Implementing a trade credit insurance program with a credit insurer, means more than protecting trade receivables. It means partnering with a credit risk management expert whose goal is to avoid credit losses and to support recoveries when they do happen. Trade credit insurance can provide valuable market intelligence on the financial viability of customers and, in the case of buyers in foreign countries, on any peculiar trading risks.
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