CREDIT RISK
As a result of globalization, there is a significant growth in trading opportunities, and companies are faced with increasingly complex needs in terms of trade receivables management. Credit insurance is a powerful tool that can provide the right protection through preliminary evaluation of buyers and securing the trade. The cover protects companies against customer defaults by insuring the sales of the companies to their buyers on credit against the risk of loss due to the insolvency and protracted default of their customers. This form of insurance can be particularly beneficial in promoting the growth of sales by allowing the secure development of new buyers, new markets, and extending credit risk insurance policies to a wider array of buyers.
Credit insurance not only mitigates the financial risk associated with buyer defaults but also provides a competitive advantage. Companies with credit insurance can confidently extend more favorable credit terms to their customers, which can lead to increased sales and stronger customer relationships. This is particularly important in highly competitive markets where the ability to offer flexible payment terms can be a key differentiator.
Furthermore, credit insurance can enhance a company's ability to secure financing. Financial institutions often view insured receivables as less risky and are more willing to provide working capital loans or other types of financing against them. This improved access to credit can support a company's growth initiatives and help manage cash flow more effectively.
The process of obtaining credit insurance typically involves a thorough assessment of the buyer's creditworthiness, which can provide valuable insights for the seller. This due diligence can uncover potential risks and help companies make informed decisions about extending credit. Additionally, credit insurance policies often include ongoing monitoring of the buyer's financial health, alerting the seller to any changes that might affect the buyer's ability to pay.
An experienced consultant is essential in navigating the complexities of credit insurance. They can advise on the most appropriate cover for your business, ensuring that you have the right level of protection tailored to your specific needs. Consultants can help in selecting the right insurer, negotiating terms, and managing the claims process, providing peace of mind and allowing you to focus on your core business activities.
Moreover, credit insurance can protect against political risks, such as changes in government policy, currency inconvertibility, or political instability in the buyer's country. These factors can impact the buyer's ability to fulfill their payment obligations, and having insurance that covers such risks can be crucial for companies engaged in international trade.
In addition to protecting against financial losses, credit insurance also facilitates better credit management practices. Insurers often provide valuable services such as credit risk assessments, buyer monitoring, and debt collection support. These services can help companies manage their credit risk more effectively and improve their overall credit management processes.
In conclusion, credit insurance is an essential tool for companies engaged in domestic and international trade. It provides protection against customer defaults, enhances the ability to secure financing, and supports the growth of sales by enabling secure credit extension to new buyers and markets. Working with an experienced consultant ensures that you obtain the right coverage tailored to your business needs, allowing you to confidently navigate the complexities of trade receivables management and capitalize on the opportunities presented by globalization.
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Buyer's Credit Analysis
Credit risk industry has extensive database of buyers created over decades of operation to provide valuable and vital information to sellers. Credit insurance companies not only carry out immediate and extensive credit analysis for every buyer but also monitor their creditworthiness.
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Credit Limit and Indemnity
The credit limit does not exceed the maximum exposure of the insured against a particular buyer and is always a multiple of the Premium. The policy may cover up to 80% of the insured debt. Recent changes in regulation allow insurers to selectively insure up to 90% of the Insured debt.
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Insuring Selective Clients
Insurers base their pricing of the risk on a gamut of default possibilities across varied buyer profiles. Credit risk does not allow a choice of overage only for one or a few high risk clients. You can nevertheless insure a specific product or business line if you keep a distinct accounting for them.
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Are All Defaults Covered
The primary purpose of credit insurance is to cover risk of delayed payments, buyer insolvency, withdrawal of trade licenses, government action preventing buyer payment. A buyer default due to a disputed trade credit or losses created due to currency risks are not covered.
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Recovery Services
Credit insurance companies have organised recovery services to assist clients in recovering their payable dues. Insureds benefit from a support service which can help them recover dues faster than the usual recoveries, improving cash cycles and risk of outstanding write offs.
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Payment of Defaulted Credit
All Credit insurance claims come into play only after the agreed credit period. An Insured can make a choice of extending the credit period provided it does not exceed the policy maximum. Once a default is intimated insurers will make payments after a 150-180 day waiting period.