What is Trade Credit Insurance? A Simple Guide for Business Owners

Imagine you run a business that sells products to customers all around the world. To make it easier for your customers, you let them pay later instead of paying upfront. This is called giving them “credit.” But what happens if your customers don’t pay you back on time or, even worse, don’t pay you at all? That’s where trade credit insurance comes in. It helps protect your business if something goes wrong with the payments.

Understanding Trade Credit

Trade credit is when you allow your customers to buy your products or services now and pay for them later. For example, you might sell $10,000 worth of products to a customer and give them 60, 90, or even 120 days to pay the bill. During this time, you’ve already shipped the products, but you’re waiting for the payment to come in.

While trade credit can help you attract more customers by giving them time to pay, it also comes with risks. If a customer doesn’t pay on time—or doesn’t pay at all—you could lose a lot of money.

Why Use Trade Credit Insurance?

Trade credit insurance helps protect your business from these risks. If your customer doesn’t pay, the insurance company will cover a large portion of the loss. This means you won’t be left empty-handed if something goes wrong.

For example, let’s say you sell $50,000 worth of goods to a customer in another country, giving them 90 days to pay. If that customer goes bankrupt or simply doesn’t pay, trade credit insurance could cover up to 90% of the $50,000. This way, you might only lose $5,000 instead of the full amount.

Real-World Example: Exporters and Trade Credit

Imagine you’re an exporter who sells products to customers in different countries. You give them 60, 90, or 120 days to pay because you want to be competitive and attract more buyers. Here’s how trade credit insurance could help:

60 Days Credit: You sell $100,000 worth of goods to a customer and give them 60 days to pay. But what if, after 60 days, they still haven’t paid? Your cash flow (the money you have available to run your business) could be in trouble.
90 Days Credit: You sell $200,000 worth of goods with a 90-day payment period. If the customer delays payment or runs into financial trouble, you could be left waiting even longer to get paid.
120 Days Credit: You sell $300,000 worth of goods and give 120 days for payment. This is a long time to wait, and if the customer defaults (fails to pay), you could lose a huge amount of money.

What are the Chances of Losing Money?

Statistics show that businesses that export goods face higher risks of not getting paid. According to some studies, there’s about a 2% to 5% chance that an international customer might default on payment, depending on the country and industry. This might not sound like much, but when you’re dealing with large amounts of money, even a small percentage can lead to big losses.

For example, if you export $1,000,000 worth of goods in a year, a 3% default rate means you could lose $30,000 if just one or two customers don’t pay. Without trade credit insurance, this loss comes directly out of your pocket.

How Does Trade Credit Insurance Work?

Trade credit insurance works like other types of insurance. You pay a premium (a fee) to the insurance company, and in return, they agree to cover most of the losses if a customer doesn’t pay.

Let’s say you have trade credit insurance, and a customer who owes you $100,000 doesn’t pay. After you file a claim, the insurance company might cover 90% of that amount, or $90,000. You’d still lose $10,000, but it’s much better than losing the entire $100,000.

Trade credit insurance is a valuable tool for businesses that offer payment terms to their customers. It provides peace of mind by protecting you from the risk of customers not paying their bills. For exporters, especially those offering 60, 90, or 120 days credit, trade credit insurance can be the difference between a small loss and a devastating financial blow.

So, if you’re in the business of selling goods and giving customers time to pay, consult with one of our advisors to see how Trade Credit can help sure up your balance sheet. It could save your business from major financial trouble down the road!