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The Unexpected Advantages of Trade Credit Insurance

Topics: Finance, Credit & Payments, Management

Perhaps your business is among the many facing great financial challenges today.  With technology as one of the driving forces, competition in the business world can be fierce. Frankly, it’s incredibly costly to build, maintain, and grow a business in today’s day and age.

It’s clear that businesses of all shapes, sectors, and scopes can face their own financial challenges. One such financial challenge is risking bad debts or unpaid accounts receivables. According to Pymnts.com and Fundbox, there’s an estimated $3.1 trillion in US businesses’ outstanding accounts receivable (AR), and the average US business has 24% of its monthly revenue held up in AR, terms, or trade credit. The average small business owner dealing with unpaid customer bills and watching customer accounts sit in default can wreak havoc on the financial health of a business and is an all-too-common problem.

Businesses often respond by increasing sales and using marketing tactics to convert more customers, improve cash flow, and sustain a profit, but they quickly realize those tactics aren’t as easy as they sound. Though prospects at times seem abysmal, the truth is that businesses are more in control of their cash flow than they might think.

In fact, there are a multitude of ways to maintain a healthy cash flow. One such method is mitigating financial risks of bad debt simply by purchasing trade credit insurance.

So, what are the advantages of trade credit insurance, and how does it work? Let’s look at what trade credit insurance is and how it can benefit your business.

What is trade credit insuranceWhat is Trade Credit Insurance?

Trade credit insurance is a risk management tool. The purpose of trade credit insurance is to protect businesses and avoid financial losses due to unpaid accounts receivables, customer default accounts, or even customer bankruptcy.

Although trade credit insurance is a significant financial investment, it can help large enterprises mitigate financial risks associated with consumer debt or large accounts receivables. Trade credit insurance, if done right, can be a great business investment.

Businesses that need receivable insuranceWhich Businesses Benefit from Trade Credit Insurance?

Any company that sells goods or services or extends credit to customers, particularly those businesses that deal with more than $5 million in sales (foreign or domestic) are the best candidates for trade credit insurance.

While some industries, such as mining, energy, metals, and automotive, reap most of the benefits of trade credit insurance, it really all comes down to the type of business and sales that they conduct. Businesses that operate in high-risk industries or that have a high risk of customer default or nonpayment will find it beneficial to purchase trade credit insurance.

So, take a good look at your own business. If the total amount of your accounts receivables is enough to impair your products, services, or your business as a whole, then it might be a good idea to purchase trade credit insurance.

Companies that wait until their receivables are unpaid to purchase trade credit insurance will risk the ability to acquire trade credit insurance at all. It may be too late, or they may end up paying higher rates due to elevated risks.

is it a good investment for trade transactions?Why is Trade Credit Insurance a Good Investment?

There are many ways that trade credit insurance can help mitigate financial risks surrounding default accounts or accounts receivables, and many businesses also used trade credit insurance as an investment vehicle to help grow their businesses.

For example, businesses can use trade credit insurance as a credit line to offer to clients and to also sell to international entities, which can help make businesses larger, stronger, and even expand geographically while simultaneously reducing risks.

cost of credit insuranceHow Much Does Trade Credit Insurance Cost?

The cost of trade credit insurance greatly depends on the business, industry, sales volume, and the overall risk associated with the amount of the receivables and the customers. Most insurance companies that offer trade credit insurance have standard rates according to the levels of risk.


However, businesses are more in control of their trade credit insurance rates than they think. Businesses can control their trade credit insurance rates by selecting the number of clients or accounts they want to insure, as well as which insurer they prefer to work with to underwrite their policies.

Businesses may also be able to choose the number of days past due before the policy kicks in and even select a percentage of the unpaid invoice that the trade credit insurance policy will cover. All of these selections can help reduce the cost of trade credit insurance—depending on the policy and insurer, of course.

is insuring receivables right for your business?What Should Businesses Consider Before Purchasing Trade Credit Insurance?

So, how do you know where to start? 

First, consider the breaking point of what your business can realistically afford if receivables go unpaid. For example, if your business can afford a bad debt expense of $50,000, then this might be a good deductible to start with.

Only a handful of insurance companies are knowledgeable of or even offer trade credit insurance. Therefore, businesses should work with insurance brokers who understand the trade credit insurance business and don’t just claim to be familiar with the product. 

Because trade credit insurance involves a great deal of flexibility and ways to set up the policy, it requires a broker who is an expert in trade credit insurance to ensure that your business acquires the right policy


Pros and cons of trade insuranceTrade Credit Insurance: Avoiding Financial Losses and Promoting Future Growth

In conclusion, trade credit insurance doesn’t pay out losses or damages as claims arise, such as the case with car insurance. You would only call your insurance agent and put in a claim if you were in an accident. The ultimate benefit of trade credit insurance is to help businesses avoid losses and damages altogether.

Trade credit insurance provides businesses in various industries and models with a risk mitigation tool that reduces financial risks and positions businesses for future growth, expansion, and further development.

However, trade credit insurance should only be purchased by an experienced, reputable broker to ensure that your business secures the right type of trade credit insurance policy — the one that best fits your business.

Keep in mind, that trade credit insurance only mitigates the risk of extending credit but does not improve cash flow. To get the best of both worlds, take a look at what Apruve offers.

Interested in trade credit solutions for your B2B company?  Apruve can help. With Apruve, you can easily extend risk-free credit to your customers worldwide, and make sure you get paid within days. Learn more about Apruve's credit network or contact Apruve’s specialists to sign up for a demo today!

Net terms accounts receivable

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Apruve enables large enterprises to automate long-tail credit and A/R so you can stop spending 80% of your time and resources on 20% of your revenue. We partner with each of our customers to solve their unique credit, payment, and accounts receivable challenges and build the right credit solutions for your markets, customers, and goals. 

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