Credit Insurance – What it is and How it Works

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When it comes to offering protection to businesses against financial struggles of unpaid invoices that take place when a customer does not fulfill their payment duties. This is a type of insurance that is designed especially for companies that render or offer credit to customers and industries that fall from manufacturing to wholesale and then to retail.

Credit Insurance - What it is and How it Works

Hence, if something unexpected happens in the economic environment, the business can get protection from credit insurance. This guide will comprise how it works, what it covers, what its exclusions are, how much it costs, and how to get a policy as a business owner. 

What Is Credit Insurance?

Credit insurance is a type of insurance that protects businesses against risk due to non-payment by customers or clients who buy goods or services on credit. It is an important tool for protecting a company’s financial health and handling accounts receivable. In other words, if a company suffers losses because of commercial debt or non-payment from customers, this insurance is going to cover all related costs.

How Does it Work?

This insurance follows a simple mechanism. Firstly, the business owner or company will need to get a policy from an insurance provider or company. Secondly, the quote will offer coverage to a single buyer or a portfolio of buyers, depending on the agreement on the policy.

Then, according to the terms of the policy, the insurance company reimburses or compensates the business if the covered buyer does not pay because of prolonged default or insolvency. Sometimes, the insurance provider may help with the debt recovery process.

What Does Credit Insurance Cover?

Here is what it typically covers:

  • Catastrophic losses.
  • Commercial risks.
  • Pre-delivery risks.
  • Political risks.

What Does It Not Cover?

Here are some scenarios where you will not be getting coverage from a credit insurance policy:

  • Disputes over goods or services.
  • Sales were made without approval.
  • Known risks.
  • Fraud by the policyholder.

In summary, the coverage and exclusions of this insurance, as well as other types of insurance, are determined by the insurance provider.

How Much Does It Cost?

The cost of this insurance policy differs based on multiple factors. Some of them include the credit terms offered, the creditworthiness of customers, turnover, the industry, and the historical default rate. But usually, the premium amount is from a part of a percent to a few percent of the sales covered.

How to Obtain Credit Insurance

For interested business owners who would like to purchase a policy, here is a step-by-step guide you can use:

  • Assess your needs.
  • Shop around.
  • Submit your application.
  • Undergo a risk assessment.
  • Review and negotiate terms.
  • Finalize the policy.

With these steps, you will have no problem securing a credit insurance policy or quote from any insurance provider.

Frequently Asked Questions

Who can benefit from credit insurance?

Any business that sells goods or services on credit terms, especially those expanding into new markets or with significant receivables,.

Is it mandatory for businesses?

No, it is not mandatory or compulsory for businesses to have a policy, but it can be highly beneficial for risk management.

How does credit insurance differ from a guarantee?

This insurance protects against non-payment of debts by customers, while a guarantee is a promise by a third party to fulfill a debtor’s obligation if they fail to do so.

Can credit insurance improve loan qualifications?

Yes, having this insurance can enhance a business’s creditworthiness by securing receivables, potentially leading to better loan terms.

What happens if a customer disputes a debt?

Disputes are generally not covered unless the dispute results in a credit event like the insolvency of the buyer.

Are there limits on coverage amounts?

Yes, coverage limits are set based on risk assessments of the customer base and the total volume of credit sales.

How does a business file a claim under credit insurance?

To file a claim, a business must submit evidence of the default and any relevant communication with the customer as per the terms specified in the insurance policy.

What is the typical duration of this policy?

Credit insurance policies are usually issued on an annual basis, but terms can vary depending on the needs of the business and the agreement with the insurer.

How quickly does credit insurance payout after a claim is filed?

The payout timeframe after filing a claim can vary, but typically insurers aim to process and pay valid claims within 30 to 60 days, depending on the complexity of the case and the terms of the policy.

Can credit insurance cover international sales?

Yes, many credit insurance policies are designed to cover both domestic and international sales, protecting against non-payment risks associated with exporting goods or services.

How does the credit limit per customer work under a credit insurance policy?

Insurers generally set a specific credit limit for each buyer based on their creditworthiness and history. This limit represents the maximum amount that will be covered for that particular customer under the policy.