For many companies, a significant percentage of their assets on their balance sheet are in the form of Accounts receivables. With the result, there is a greater chance that a business will suffer a loss, if there is delay or default in payment by the customers. This makes it essential for businesses to be protected from all kinds of risks and eventualities associated with credit – including customer defaults, insolvent buyers and political uncertainties which may impact business ties and eventually, the business.
What is credit insurance?
In a nutshell, credit insurance is a protecting solution that safeguards your company when your customers default. This insurance policy will cover the sales of the companies to its buyers on credit against the risk of loss due to the insolvency of their customers.
A business has multiple external stakeholders and a protecting solution like credit insurance has the potential to play a vital role in the trading cycle of any company. Many companies suffer financial setbacks due to unpaid invoices. Adopting an insurance plan can help your business by protecting profit, cash flows, sales growth, the balance sheet and a company's customer base. It can assist in the growth of sales by allowing the secure development of new buyers, new markets and the credit extended to a buyer.
What is covered under a Credit Insurance Policy?
A Credit Insurance Policy will protect a business against the risk of non-payment resulting from the following:
When a customer becomes insolvent.
- Protracted Default
Non-payment of an undisputed invoice beyond due date, even though a customer has not become insolvent
- Political Risk
Non-payment due to political reasons like currency inconvertibility, war, import and export restrictions or license cancellation because of the decisions taken by the government. Coverage for political risks is not applicable for domestic transactions.
Benefits of Credit Insurance
- Identify potential risks
A credit evaluation service will evaluate and analyze an organization’s vulnerability to potential risks.
- Safeguard your company from defaults
Many times, recovering losses occurring because of defaulting customers and associates is beyond an organization’s control. A credit insurance plan can help an organization from potential adverse impact by covering such losses.
- Explore new markets and acquire new buyers without worry
One of the most important benefits for a company purchasing Credit Insurance is the fact that they can leverage on their potential to expand their business to new markets and newer buyers without worrying about defaults. With the protection of a credit insurance policy, a business can offer credit to new customers.
- Improves credit control procedures
Clients are able to assess the quality of current and potential clients. This helps them manage the terms and duration of credit sales , thus lowering the number of incidences of bad debt and debt collection practices.
A Credit Insurance Policy will not cover losses in case of the following eventualities –
- Disputes with the buyer leading to withholding of partial or full payment
- If the defaulting customer is a department of the State or Central government
- Cost to resolve dispute between buyer and insurer
- Amount exceeding the credit limit approved
- Prior and Pending actions/ claims
Since the policy wordings vary from insurer to insurer, it is necessary to understand clearly the coverage and exclusions offered in the context of business operations of a company.
*(The details furnished above are only a summary of the policy features and do not describe all the terms, conditions and exclusions in the policy. Policy finally issued upon binding the cover represents the legal contract between the insured and insurer. If you are interested to know more, please get in touch with our representative)