Credit insurance protects businesses from the financial risks of non-payment by customers. It can cover domestic and export receivables and is designed to help businesses manage their credit risks, freeing up working capital and enabling them to trade confidently.
The risk of non-payment: If a customer does not pay their invoice, the business will still be liable for the debt. The insurer will only pay out if the customer becomes insolvent.
The risk of customer insolvency: If a customer becomes insolvent, the business may not be able to recoup the value of the debt from the customer. The insurer will only pay out if the customer meets the policy criteria for insolvency.
The risk of policy non-renewal: If a business’s credit insurance policy is not renewed, the business will be without cover and exposed to the entire financial risks of non-payment.
A credit insurance policy pays out if a customer is unable to pay their invoice or if they become insolvent. This can either be on a per-invoice basis or, in the case of insolvency, as a percentage of the value of the outstanding debt. It works by:
Transferring the risk of non-payment from the business to the insurer: transferring the risk means that the insurer, rather than the business, bears the cost of any losses arising from non-payment. This can help to protect businesses from the financial impact of bad debts. This process is sometimes known as ‘factoring’ and is a form of financial asset securitization.
There are many benefits associated with credit insurance, including:
Protection from the financial risks of non-payment: by transferring the risk of non-payment to an insurer, businesses can protect themselves from the financial impact of bad debts.
Protection from the financial risks of customer insolvency: if a customer becomes insolvent, their ability to pay outstanding invoices is often affected. Credit insurance can provide cover for these debts, helping reduce the financial impact on businesses.
Confidence to trade on credit: by reducing the financial risks of non-payment, businesses can feel more confident about extending credit to customers. This can help businesses to grow and develop their customer base.
Release of working capital: by transferring the risk of non-payment to an insurer, businesses can free up working capital that would otherwise be tied up in bad debts. This can help businesses to invest in growth and development.
Providing cover for bad debts in the event of customer insolvency: if a customer becomes insolvent, their ability to pay outstanding invoices is often affected. Credit insurance can provide cover for these debts, helping reduce the financial impact on businesses.
Giving businesses the confidence to trade on credit: by reducing the financial risks of non-payment, businesses can feel more confident about extending credit to customers. This can help businesses to grow and develop their customer base.
Helping businesses to free up working capital: by transferring the risk of non-payment to an insurer, businesses can free up working capital that would otherwise be tied up in bad debts. This can help businesses to invest in growth and development.
Enable businesses to access finance: businesses with credit insurance in place can often use their policies as collateral when applying for finance. This can help businesses to access the finance they need to grow.