Understanding Trade Credit Insurance and its Benefits for businesses SMEs to MNCs
Extending Commercial credit has been a very vital instrument which directly result in:
- Increase sales and
- Increase customer base within the country and outside the country.
However, this practice exposes sellers to risk of delayed payments and defaults. Dealing in different cultures, language, political environment and getting involved in legal paperwork in different countries hampers opportunities to grow the business.
Since between 20% to 60% of all assets on balance sheets are constituted by commercial credit, effective credit management becomes an essential tool to succeed in business.
Unfortunately, credit management is often neglected by small and medium-sized enterprises (SMEs), which typically lack the administrative resources
- to assess buyers’ risks,
- to tailor credit terms
- to reflect these risks and
- to monitor payments and
- to deploy most cost efficient collection process.
In comparison to smaller companies, large firms dedicate vast resources to credit management, which together with their bargaining power grants them important competitive advantages.
To overcome this problem of creating very effective and long term credit management systems; SMEs can alternatively rely completely on Trade Credit Insurance policies. The Trade Credit Insurance policy comes along with:
- Top of the line receivable management practices
- A guarantee of reimbursement of unpaid invoices, varying from 70% to 90% of the receivables insured.
- Cover against all kinds of defaults such as:
- Buyer insolvency,
- Willful default
- Political actions resulting in buyer delay/ default
- Inconvertibility or non- transferability of export proceeds.
Credit insurance also allows small firms to improve their credit management capacity. The credit insurer is able to provide
- Training and advice to the company to enhance sales,
- Credit and marketing functions, such as customer screening, risk assessment, market prospect
- Follow-up and
- Collection procedures.
- This also includes reimbursement of legal cost, which in foreign countries can be a huge amount.
Credit insurance is also a very important tool to avail working capital financing or sometimes off-balance sheet financing which is called as “Trade financing” or “Receivable Financing”. The seller can access financing against their receivables in either of the two ways:
- By securing Credit insurance on their receivables, banks can fund additional lines.
- By securing Credit insurance on their receivables Seller can sell the invoices to a factoring company.
Credit insurance is thus more than a simple insurance policy.
It can be a complete risk management tool that helps management to put in place the necessary procedures to prevent and minimise late payments and defaults, reducing the risk of the receivables portfolio and enhancing the capacity of using commercial credit as a competitive tool.
Since this insurance covers delays in the payment and also political actions in other country; it becomes all the more important in the unprecedented times like we are facing currently. COVID 19 as a Global Pandemic is causing global shutdown/ lockdown due to government actions or as a precautionary measures. This is resulting in delayed payment across the industry and across the globe.
All the companies who are already covered by Credit Insurance will go through this phase with relative ease since their payments are secured even if this slowdown/ government action continues for a bit longer period.
The author Mr. Suresh Khairwar represents one of the best underwriting brains in credit insurance space in India. He has been directly involved with every phase of credit insurance movement starting from the product’s introduction in India; to its restrictions and now he is actively engaging various stakeholders, including General Insurance Council and IRDA (Indian insurance regulator) to liberalize credit insurance in Indian market.
His work in the Indian market of more than 20 years, majorly revolved around receivables management space which includes; setting up a successful and profitable Reinsurance department in GIC Re, set up Euler Hermes to become no. 1 in India within two years and floated India’s first Multinational Mono-line Insurance Broking company in India; to name a few.Connect