How trade credit insurance works

Trade credit insurance is designed to complement proactive customer relationship management by aiming to align credit terms with customer risk profiles. When applying for coverage, insurers will often first assess how your business underwrites customers and manages collections—factors that may directly influence your rates. Insurers often evaluate historical data and industry benchmarks to assess risk.

“Sellers should know their clients better than anybody. If a company isn’t doing its due diligence, it may be purchasing more insurance than is otherwise needed, or its insurance may be more expensive than it should be,” Benson said. 

Insurers underwrite and continuously monitor insured customers. If a covered customer fails to pay for a covered reason, the insurer pays the claim. Trade credit insurance policies may include credit management and reporting requirements designed to minimize losses, such as financial reporting and adherence to specific credit limits. 

“If a customer’s credit begins to deteriorate or they’re not paying, and you continue to sell to them, that may be a potential issue,” Benson said. “The policy coverage also needs to match how your business operates.”

One key exclusion: Trade credit insurance generally doesn’t cover payment disputes between buyers and sellers. “If there’s a receivable for 100 products, and the buyer says only 80 were delivered, the insurer’s payment obligation may only be on the undisputed amount,” Benson explained.

Understanding these exclusions is crucial for businesses trying to avoid unexpected gaps in coverage. 

Trade credit insurance vs. accounts receivable finance

Accounts receivable finance offers an alternative approach to payment protection, providing businesses with immediate cash flow if they sell their invoices to a bank at a discount. This option can be particularly beneficial to companies looking to improve working capital, extend payment terms, support larger contracts or expand their customer base. However, there are key differences between accounts receivable finance and trade credit insurance: 

• Cash flow impact: Selling invoices provides a business immediate payment, enhancing working capital and allowing for reinvestment or covering operational expenses, for example. In contrast, trade credit insurance tracks a business’s standard payment timelines and would only cover a loss that occurs if the standard timelines are not met by the customer. "If you just need risk cover, insurance can be a good option. But if you want the cash flow benefit, that’s where receivables finance stands out,” Benson said. 
• Oversight requirements: Selling receivables typically requires less management than trade credit insurance. Finance or accounts receivable teams can often handle it internally, while insurance may demand dedicated staff to manage insurer relationships and reporting requirements. The level of oversight required can depend on the complexity of the transactions and the size of the business.
• Cost: Selling receivables generally costs more than trade credit insurance because it delivers both working capital benefits and credit protection. The added value of immediate cash flow and reduced credit risk to the business contributes to the higher cost.

Understanding these differences can help businesses choose the option that best aligns with their financial strategies and operational needs.

Key considerations for businesses

When assessing the need for trade credit insurance or accounts receivable finance, businesses should evaluate critical factors to maximize alignment with their financial strategies and business goals, including but not limited to: 

• Customer credit profile: What is the likelihood of customer non-payment? Businesses can assess this by reviewing credit scores, payment history and industry trends to gauge the risk associated with each customer.
• Business stability: Can you extend payment terms or absorb potential customer defaults without compromising liquidity? Consider your cash flow projections and contingency plans to ensure that your business can maintain stability in the face of financial challenges.
• Management capacity: Do you have sufficient resources to administer a trade credit insurance program? This may involve staff training, system integration and ongoing monitoring to effectively manage the program and maintain insurer relationships.
• Cost-benefit analysis: Do potential protection benefits outweigh insurance premiums or receivable financing costs? Will the transaction opportunity justify these expenses? Conduct a thorough analysis, considering both quantitative and qualitative factors, to determine the best financial strategy for your business.