By Kimberly Kelly
Kimberly Kelly has more than 10 years in credit, risk and trade credit insurance. She is the founder and CEO of Trade Credit Specialty, a client-focused trade credit insurance brokerage.
Credit management isn’t science. Cash flow from credit sales is unpredictable. How can this unpredictability be mitigated?
The answer is trade credit insurance.
A trade credit insurance policy is a dynamic business tool that credit managers can leverage on a daily basis to safely increase sales, transfer the task and responsibility of performing due diligence and collections, support financing and ultimately strengthen company financial statements.
When open account invoices are not paid on time, threatening cash flow due to protracted default (slow payment), or insolvency, the insurance policy is triggered and a claim payment is made. Cash flow is stabilized.
A trade credit insurance policy can be easily incorporated into the existing credit management procedures, creating efficiency by eliminating tasks for the credit management team in addition to eliminating the risk of bad debt:
Any company extending unsecured credit to other businesses is at risk for experiencing bad debt losses. Trade credit insurance mitigates that risk. In the event of a bad debt loss, the policy is triggered and a claim payment is made, preserving cash flow.
When leveraged, a trade credit insurance policy can also offer additional benefits, potentially absorbing the cost of the policy, even when claim-free. Benefits of trade credit insurance include:
As previously noted, the cost of the policy can often be absorbed by the increased efficiency of the credit management team and the elimination of expenses, but what about pricing, fees and costs?
To calculate the premium rate, carriers will weigh the spread of risk of the buyer portfolio to be insured. Additionally, the premium rate formula will include variables such as volume of sales, industry sector, terms of sale, country risk, even the product or service insured can impact the ultimate premium. Pricing may be calculated based on sales, coverage or average monthly accounts receivable.
In general, a trade credit policy is typically a fraction of 1% of sales, or, less than 100 basis points. Of note, private market carriers have no minimum premium requirements ranging from $10k to $25k depending on the specific product. The U.S. Export Import Bank, also known as ExIm Bank, will offer pay-as-you-go options for companies exporting US manufactured goods with no premium requirements, making them a great choice for small businesses.
Kimberly Kelly can give you more insights and information about trade credit insurance. Trade Credit Specialty advises, supports and provides technical expertise related to trade credit insurance.