Accounts Receivables are one of the largest assets of a Company. A large part of today’s business is conducted on credit basis with the seller extending credit to the buyer. However, the risk of unpaid invoices is one risk which most business owners don’t pay enough attention to.
Ignoring the risk of unpaid invoices can have disastrous consequences for business owners. Many business owners have faced major setbacks because they ignored the risk of unpaid invoices. Several businesses are nearing insolvency as the world’s major economies slow down. For suppliers, non-payment of dues by creditors may result in significant losses and put their businesses at risk.
Fortunately, business owners can protect themselves from the risk of unpaid invoices by purchasing Trade Credit Insurance in India. A Trade Credit Insurance Policy is also known as Accounts Receivable Insurance.
This article will elaborate on the benefits of a Trade Credit Insurance Policy
What are the advantages of Trade Credit Insurance Policy in India?
A Credit Insurance Policy enables a business to grow securely and in a stable manner by insuring the big risk of unpaid invoices. It protects the business from volatility in cash flows by insuring the seller against the risk of non-payment by buyer for the goods/services he has received.
The 5 major benefits of a Trade Credit Insurance Policy are as follows:
- Better business competitiveness: A Credit Insurance Policy allows the seller to extend longer payments terms and higher credit limits to the buyer which in turn makes the business more competitive.
- Favourable interest rates on loans: A Trade Credit Insurance Policy allows the seller to secure loans at better interest rates since his receivable risk is secured.
- Ability to sell to new customers: A Credit Insurance Policy allows the seller to sell to new customers on credit basis, thus allowing the seller to grow the business.
- Enter new geographies: Selling to customers in overseas territories is difficult as the seller doesn’t know the credit worthiness of the buyers. This problem is mitigated by a Trade Credit Policy since the seller knows that his receivables are backed by a Credit Insurance Policy. This allows the seller to expand the business without worrying about payment defaults.
- Get warning signals on buyers: A Trade Credit Insurance Company in India will have information about the credit rating of buyers. This will give seller early warning signals about potential payment difficulties of the buyers and avoid future losses by stopping further sales.
How Does a Trade Credit Insurance Policy Work?
If a customer is does not pay for goods or services that he has received from the seller, it becomes a business risk for the seller. In such a scenario, the Trade Credit Insurance Policy will pay the dues to the seller.
A Trade Credit Insurance Policy provides insurance against the risk of unpaid dues for any form of credit-based sales. A Trade Credit Insurance Policy insures the risk of unpaid invoices if the seller does not receive his due payment in the following scenarios:
- Protracted Default– The Credit Insurance Policy will make the payment to the seller if the buyer delays the payment beyond a pre-defined time period. In case a customer delays beyond the designated period from the due date, it becomes a protracted default for which sellers need to be compensated through the policy.
- Political Risks – In some cases, it may not be possible for the buyer to make a payment due to uncontrollable circumstances. Political issues within a country can, hamper pending payments from an international customer. A Trade Credit Insurance Policy can be of invaluable help in such cases.
- Insolvency– There are situations where the buyer declares bankruptcy and puts the amount owed to the seller in jeopardy. In such a scenario, the Trade Credit Insurance Company will make good the payment.
As you can see, a Trade Credit Insurance Policy can be a valuable tool to grow your business without worrying about payment defaults. There are many trade credit insurance companies in India which provide comprehensive credit insurance solutions to businesses. Companies interested in purchasing a Trade Credit Insurance Policy should avail the assistance of an experienced Trade Credit Insurance Broker, who will assist them in comparing Trade Credit Insurance Coverages amongst various Trade Credit Insurance Companies in India. Additionally, make sure to thoroughly read the exclusions in a Trade Credit Insurance Policy to avoid any unwanted surprises later on.