What is trade credit insurance?
Cash flow insurance
Credit insurance can be used in conjunction with cash flow facilities such as invoice discounting or factoring, which are usually provided by financial institutions. While having credit insurance doesn’t reduce your payment cycle the same way as these debtor finance products, it can provide extra security to complement a cash flow facility.
“The banks typically say ‘we’ll lend you the money, but on the due date we’ll debit your account. If the debtor hasn’t paid, we will still debit you’. A company can tell the bank they have the policy in place so in the case of a non-payment, the bank can take claim of the payment instead.
“The bank might then say ‘we can lend a bit more than [the standard] 80 cents in the dollar’ or at the time of the non-payment, ‘we will not debit your account because we know your insurer will make the indemnification’,” explains Vollbehr. “You turn a recourse facility into a non-recourse facility backed by an insurance policy.”
To get the most from a credit insurance policy, Vollbehr says the insurer needs to work with your finance department, and the policy needs to complement any existing credit terms you have in place with your debtors, including proper notification of overdue accounts, before you can make a claim.
“A policy should wrap around an existing policy that the company should have in place,” he advises. “This product needs to be understood by companies capable of managing a credit insurance policy. It’s a product that’s used as an assistance to the credit department.”
Where to buy
Credit insurers in Australia
- Atradius: www.atradius.com.au
- Coface Australia: www.coface.com.au
- EFIC: www.efic.gov.au
- Euler Hermes: www.oceania.eulerhermes.com
- National Credit Insurance (Brokers): www.nci.com.au
- OAMPS: www.oamps.com.au
- QBE: www.qbe.com.au
Do you need credit insurance?
If you answer ‘no’ to any or all of these questions, you should consider credit insurance.
- Do you have the capacity to assess your customers’ exposure to risk?
- Can you offer competitive credit terms and have confidence you will be paid?
- Are you confident that your largest debtors are capable of paying you on time?
- Do you have adequate contingencies to deal with late payments or non-payments?
- Are you confident that your key clients are not at risk of insolvency?
- Does your business have the capacity to manage debtors and collect debts as required?
- Can your business absorb all the risks to which it is exposed and still be profitable?
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