Businesses buy trade credit insurance to protect against the risk of non-payment when selling goods and services to customers on credit terms (i.e., with deferred payment). If a customer fails to pay within the agreed time frame and the conditions of the policy have been met, the insured company files a claim with its insurer for payment.
Trade credit insurance is commonly used by businesses that export and want to protect their cash flow. (For example, purchasing insurance can relieve concerns over an international customer’s ability to pay due to political unrest or blocked funds.)
More about trade credit insurance
According to Export Development Canada (EDC)—a major provider of credit insurance to Canadian companies—businesses may also consider this type of insurance if they want to do the following.
- Be more competitive by offering deferred payment terms to their customers rather than asking them to pay upfront.
- Use their accounts receivable as collateral for financing.
- Sell their foreign accounts receivable to a collection/factoring agency to increase cash flow.
Trade credit insurance is often confused with credit insurance, which borrowers purchase to ensure the amount owed to a lender will be paid if they are unable to do so because of, for example, death or disability.