Trade credit insurance explained

What is trade credit insurance?

When you supply now and allow a customer to pay later, the unpaid invoice is a trade credit exposure. Insurance can protect against specified causes of non-payment, commonly customer insolvency or protracted default. Some policies also cover specified political risks affecting overseas trade.

Cover is subject to the policy’s terms. It is not a promise that every overdue invoice will be paid immediately. Insurers assess buyers and may set individual insured credit limits. See the Association of British Insurers’ explanation.

Why can a single bad debt matter so much?

The invoice may include costs you have already paid: stock, wages, delivery and subcontractors. The profit from other work then has to replace that loss before it contributes to growth.

For a purely illustrative example, replacing a £12,000 loss from future sales at a 10% contribution margin would require £120,000 of extra sales, assuming the same margin and no other changes. Your own costs and accounting treatment will determine the real impact.

How does a policy work?

1. Describe your trading. An insurer or broker considers your turnover, markets, buyers, payment terms and loss history.
2. Agree the scope. Cover may be arranged for a portfolio, selected buyers or a particular exposure, depending on what is available.
3. Stay within the terms. Check insured limits before supplying, monitor overdue accounts and follow reporting requirements.
4. Notify a problem promptly. Follow the policy’s collection and claims process. Late notification or unauthorised changes to terms may affect cover.
5. Claim for an insured loss. Any payment depends on an accepted claim, the insured percentage, deductibles and limits.

Allianz Trade’s product FAQs explain buyer assessment, limits and the difference between insurance and invoice finance. The exact rules are those in the policy you buy.

Will it replace the whole invoice?

Not necessarily. Policies vary in how much of an eligible debt they indemnify. For an illustration only, 90% cover on a fully eligible £12,000 loss would be £10,800 before any further deductible or restriction. That percentage is an example, not a quotation or a standard entitlement. See an insurer’s claims explanation.

Questions to ask before buying

• Which customers, countries and causes of loss are covered?
• What is the insured percentage, excess, aggregate deductible and maximum payout?
• How do buyer limits work, and what happens to existing orders if a limit is reduced or withdrawn?
• How soon must you report overdue invoices or adverse information?
• Can you agree extended terms or a payment plan without the insurer’s consent?
• How are disputed invoices, pre-existing arrears, related businesses and excluded territories treated?
• What waiting period and evidence apply to a claim, and who handles collections?
• What premium, fees and reporting work will be involved?

Ask for the answers in the policy wording and schedule. Do not assume a new policy will cover a problem you already know about. Premiums and suitability depend on the risk; a regulated broker or insurer can explain the available options.

Where do company credit checks fit?

Insurance transfers defined risks. A company report helps you make the trading decision in the first place. Use available evidence to confirm the legal buyer, assess a proposed credit limit and decide whether to request a deposit.

A FindCompany report does not grant an insured credit limit or change a policy. An insurer’s requirements take priority for insured trading. Continue to review customers, including long-standing ones, when orders grow or payments slow.