Credit insurance or debt cancellation insurance is a type of insurance to protect businesses from non-payment of debt. Organizations can have serious cash flow problems by not paying when the debt falls due. This is a default risk, businesses, large and small and in all sectors might come to face.
How does credit insurance work?
One of the biggest risks that companies face comes from buyers who delay or default on payments. The primary function of credit insurance is to protect against the risk of debtor default. Greater competition and technological advancement have made credit insurance a cost-effective, dynamic and increasingly essential tool for handling trade risk. It makes sure invoices will be paid and allows companies to reliably manage the commercial and political risks of trade that are beyond their control.
Benefits and Advantages
Capital is protected:
Cash flows are maintained
Loan servicing and repayments are enhanced
Earnings are secure
Better relationship with customers (
Allows you to create more customer-friendly payment agreements, thanks to guarantee covers.)
Confidence to explore new markets
Only a certain percentage of the loss will be covered.
There are usually other exclusions and limitations on coverage.
Foreign accounts are usually excluded from coverage.
Trade credit insurance policy usually will not cover accounts that have a very high credit risk.
The Cost of a Credit Insurance
Credit insurance is more expensive than other forms of insurance, mainly due to the higher labor and capital intensity of its operation.
Types of Credit Insurance
Trade credit insurance
Trade credit insurance protects manufacturers, traders and service providers against losses from non-payment of a commercial trade debt. It make companies feel secure in extending more credit to current customers, or to pursue new, larger customers that would have otherwise seemed too risky.
Credit life insurance
Credit life insurance makes payment on the debts if the borrower dies.
Credit disability insurance
Credit disability insurance makes payment on the debts if you can’t work due to a covered illness or injury.
Unemployment insurance makes payment on the debts if you quit your job, are self-employed, or if you are fired for cause.
Credit property insurance
Credit property insurance protects personal property used to secure the loan if destroyed by events like theft, accident or natural disasters.
Consumer credit insurance (CCI)
Consumer credit insurance covers you if something happens to you that affects your ability to meet your credit repayment.
Taking out a credit insurance policy can provide a seller with a competitive advantage, since it gives the insured party the ability to offer credit to buyers, while noninsured competitors will insist on cash or collateral to cover the risk involved. Having this coverage establishes a seller’s credibility in the marketplace, and that can have a positive impact on its credit ratings and perceived creditworthiness.