Credit insurance provides protection for business against failure on the part of customers to pay debts. Credit insurance is useful when a customer can not pay off debt within stipulated time period or when the customer becomes in solvent. Such risks that arise in business are called as commercial risks. Export companies will have to protect themselves against political risks also which leads to delayed payment or cancellation of payment. Such a situation might arise due to a war in the country of buyer or due to cancellation of contract of the country of buyer or due to some new regulations implemented by buyer country that prevents import or export of goods or when transfer of hard currency is restricted by buyer’s country.
Credit insurance is taken by those who have business selling on the basis of terms of open account. They are the biggest beneficiaries of credit insurance. The firm might be small or large one. Credit insurance is used by firms in all sectors of economy ranging from business service providers to those doing goods trading.
Credit insurance is available for a period of one year and the amount paid towards premium is receivable in a year. Some times the term period is less than a year only. The minimum sales for taking credit insurance is a minimum of €1,000,000 annually for the thing to be cost effective.
Credit insurance are always preferable for a company that has 40% of its assets in the form of trade debts. At times more than 40% of assets are in the form of trade debts and this might be up to 90%. You cannot make sure that a client will not make default of payment. Defaults are usual in business and most of them or more than 50% is from vendors with whom the firm is having long term relationship. The cost incurred to company under the situation of repayment is so high. Moreover the cash flow lost is also very high. Investment capacity of the company will be lowered due to non payment. Credit insurance helps you to manage all these things and with credit insurance accounts receivable is managed and it compensates non payment situation too.
Some other benefits include
Credit insurance is thus, one of the most important financial instruments in one’s life. These policies can cover unexpected incidents and save our money at the right time. Just be careful to choose the right kind of insurance for you.