How to Use Trade Credit Insurance to Manage Your Credit Risks

Giving trade credit to your customers is common. Afterall, trade credits can help your business maintain competitiveness and increase sales.

However, there is always a risk that your customers might not pay up. Customers who default can be financially devastating to your business.

In this article, we will share how can you manage your credit risk with trade credit insurance, and other considerations you should take in this process.

What is Trade Credit Insurance?

Trade credit insurance protects your account receivables from loss due to credit and political risks. Examples of credit risks included insolvency, bankruptcy or protracted default. Another term for trade credit insurance is accounts receivables insurance.

How Trade Credit Insurance Works?

After you have indicated your interest to purchase a trade credit insurance, you will need to submit the full name of your customer, the full mailing address, the limits required and the estimated annual turnover with your company. Subsequently, the insurance company will assess the financial well-being of your customers and based on their past records with the buyer, they will approve your requested limits.

trade credit insurance relationships

Assuming that you purchase the insurance, the insurance company will indemnify you up to the agreed credit limit if your customer default, up to maximum 90%. Thereafter, the insurance company will chase your customer for the payment. The remaining 10%, which will be borne by you, is required so that you can assist the insurer to chase after your customers for the 90% debts.

trade credit insurance relationships in the event of default

Therefore, a trade credit insurance limits your losses when your customer defaults.

When should you consider trade credit insurance?

As long as you are extending credit to your customers, you will benefit from buying trade credit insurance.

Credit risk is even greater when you are extending credit to foreign customers. Due to potential political risks and hassle in international debt collections, trade credit insurance will give you an assurance in growing your business.

How Trade Credit Insurance Can Help You?

Protects You from Suffering the Cost of Default

The most obvious benefit of trade credit insurance is that it protects you from suffering the cost of default.

Anyway, that’s what trade credit insurance does.

However, you might not be aware of the impact when there is a default.

Imagine you have a net profit margin of 10%.

If your customer default on their $2,000,000 payment to you, you will need to generate sales of $20,000,000 to cover back the loss. The impact is greater when your net profit margin is lower.

If your net profit margin is 2%, you will have to generate sales of $100,000,000 to cover the cost of default.

Allows You to Set More Competitive Terms

When you have the assurance that your default risk is limited, you can set more competitive terms in pricing or payment period. With a more competitive pricing and payment terms, you are likely to get more customers.

Assesses Your Credit Risks

Do you know how much credit risks you are taking with your current customers?

One way to find out is to conduct background checks of your customers and look into their financial status. This can be time-consuming and distract you from growing your business.

Another way is to request quotations for trade credit insurance. In the process of giving quotations, the insurance company has to assess the credit risks of your customer pool. Based on the quotation and the credit limits set, you will have a rough idea on your customers’ credit risk profile.

Strengthens Your Financial Position

As trade credit insurance guarantees a certain value of your accounts receivables, the quality of your accounts receivables will improve.

This improvement in the quality of your assets will place you in a better bargaining position when you are looking for outside funding, for example, taking a loan from the bank.

Because you are now suffering less risk, you can negotiate better terms, such as higher credit limit for your credit line, lower interest rate, longer repayment period.

With better credit terms, you can use the flexibilities to grow your business.

Monitors Credit Risks of Your Customers

The insurance company also monitors the credit risks of your customers throughout the lifetime of the insurance.

For example, when your customer defaults on its supplier, this information will be part of a network that the insurance company is in. If the insurance company receives a notification, they will inform you that your customer is not paying their supplier.

In this scenario, you can consider lowering your credit limits with this particular customer. Such valuable information can be good as you can limit your exposure.

Factors to Consider When Buying Trade Credit Insurance

Before committing to purchase trade credit insurance, you should consider the following factors:

Assess Your Credit Risks

Trade credit insurance is especially useful for companies with a concentrated customer base in a cyclical industry. If your customer base is diversified enough, and you are operating in a very stable industry, you might not need a trade credit insurance.

If you are unsure on how to assess your credit risks, you can contact us for a free quotation. That way, you will have a sense of how much credit risk you are taking.

Costs of Trade Credit Insurance

The premiums of trade credit insurance are usually quoted as a small fraction of your sales.

Factors affecting the premiums are:

  • Credit limits for each customer. The higher the credit limits, the higher is the premiums.
  • Terms that you have extended to your customers
  • Industry risks
  • Your previous collections experience

Trade credit insurance is specific to every company. Feel free to contact us for a free quotation so that you will know the cost.

Once you got the cost, you have to decide whether should you pass on the cost of the insurance to your customers. You should balance between the additional sales you would have generated when you did not pass on the cost and the insurance premium.

One way to make this decision is to use your net profit margin as guidance. The lower your net profit margin, the higher is the cost of trade credit insurance relative to your profits. However, you are also more sensitive to credit risks. In that case, you should consider passing on the costs to your customers.

Alternative Methods of Managing Credit Risks

Trade credit insurance is not the only way to manage credit risks. Another popular method is factoring.

Factoring refers to selling your accounts receivables at a discount. For example, if you are expected to collect $100, you sell your accounts receivables for $90.

There are some advantages to factoring. First, you will receive the cash upfront instead of waiting till the payment is due. Secondly, you also eliminate the risks of default.

However, factoring is usually more expensive than trade credit insurance.

Factoring is very useful in situations where you need cash urgently, and you have no access to a credit line. Otherwise, trade credit insurance is the preferred method for managing credit risk.

Trade Credit Insurance Scheme (TCIS) by International Enterprise (IE) Singapore

To encourage Singapore companies to expand internationally, IE Singapore will support up to 50% of the minimum premium of trade credit insurance.

To qualify, your company needs to be under the Global Company Partnership programme, and meet the following criteria:

  • Global HQ is in Singapore;
  • Turnover of the company and subsidiaries not exceeding S$100 million
  • Minimum paid-up capital of S$50,000
  • At least three managerial staff who are Singaporeans and PRs

If you qualify for the scheme, we can assist you in submitting your application to IE Singapore.

Reputable Insurance Company and Agent

This applies to all kind of insurance. Having a reputable insurance company and an agent will give you the assurance that your risks are being well-managed.

A well-qualified agent, like Anthola, will also be able to advise on your coverage, specific to your situation and industry.


Giving favorable credit terms is critical in generating sales and maintaining your company’s competitiveness.

However, allowing credit terms will give you another headache:

Your customer might default on their payment.

With trade credit insurance, not only you do not have to worry about credit risk anymore, but you can also concentrate your effort on expanding your business.

Do you want a free quotation and assessment of your credit risk profile? Feel free to contact us. We love to speak to you!