How Trade Credit Insurance Protects a Company’s Assets, Unlocks New Markets
By Jamie McNeill, McGriff Vice President, Commercial Insurance
Accounts receivable are critical to a company’s balance sheet, directly affecting cash flow and profitability. Yet while most companies insure against property loss, liability, and other unpredictable, high-exposure events, their most valuable asset is open to loss. There is a safer way to do business: trade credit insurance.
Trade credit insurance protects businesses from the financial risk of selling goods or services on credit. The policy ensures that a business will be compensated if its
How Trade Credit Insurance Works
When a company sells on terms—whether 30, 60, or even 120 days—the seller is exposed to non-payment risk during this period. Trade credit insurance acts as a safety net by covering the buyers’ creditworthiness. Essentially, the insured party is the seller, while the insured “asset” is the buyer’s ability to pay its invoices. If a buyer defaults due to insolvency or slow/nonpayment, the insurance carrier compensates the seller, typically up to 90% of the invoiced amount.
Who Should Consider Purchasing Trade Credit Insurance?
While trade credit insurance applies to businesses of various sizes, it’s most commonly used by companies with substantial sales volumes or those operating in international markets. Companies generating more than $10 million in annual sales are often good candidates for this coverage. The policy becomes especially valuable for:
In scenarios where 50% to 60% of a company’s revenue is tied to a single customer, non-payment risks pose a significant threat. Trade credit insurance provides peace of mind by ensuring the business against potential losses from such concentrated exposure.
The Underwriting Process: What to Expect
Underwriting for trade credit insurance involves assessing the financial health of a company’s customers. Businesses provide a list of customers they wish to insure and the credit limits they seek for each one. The insurer then reviews these customers, offering coverage limits based on their risk assessments. For instance, they may approve a $1 million limit for a major corporation but offer only $50,000 for a smaller company. Once the buyer is approved and the policy is in place, the seller can safely extend credit to that customer, knowing that receivables are covered up to the insured limit. However, if a business exceeds the approved credit limit, it is self-insuring for the overage.
Not a One-Size-Fits-All Policy
Trade credit insurance is not a blanket policy but, rather, buyer-specific coverage. Each customer has an individual credit limit, and the premium is calculated based on that limit. For example, a business could have a policy covering 200 different customers with distinct limits, yet the overall policy may have a maximum liability cap—say, $10 million. This means the total amount payable by the insurer across all claims cannot exceed that cap.
In catastrophic events where multiple customers fail to pay simultaneously, the policy ensures coverage up to the total liability limit. However, only a few claims are typically expected to occur at any given time.
Cost Considerations
Trade credit insurance is generally considered affordable, though pricing can vary based on several factors:
Policies are written on annual basis.
Triggers for Claim Payout
A trade credit insurance policy can be triggered in two primary ways:
In either scenario, if the insurance carrier is able to recover any funds, the proceeds are shared between the insured and the insurer on a 90-10 basis until the seller is fully compensated.
Expand into New Markets: Protecting the Top and Bottom Line
One of the key benefits of trade credit insurance is its ability to help companies expand into new markets without the fear of non-payment. Businesses can confidently enter new regions or industries by ensuring receivables from unknown or foreign buyers. For instance, a regional company primarily operated in the Southeast U.S. could start selling in California or even exporting to international markets, knowing that their receivables are insured.
In this way, trade credit insurance protects both the top line (enabling sales growth in new markets) and the bottom line (safeguarding against losses due to customer non-payment).
A Strategic Investment for Growing Businesses
While trade credit insurance may not yet be a standard practice for all companies, it offers significant value for businesses looking to manage risk, particularly when extending credit to new or international customers. For companies with high sales volumes or exposure to concentrated customer bases, this policy can be a crucial tool for protecting receivables and fostering growth. Whether navigating domestic markets or expanding globally, trade credit insurance provides a financial safety net that is difficult to overlook in uncertain economic times.
About the Author
Jamie McNeill is a member of the McGriff Trade Credit specialty practice. He has 15 years of experience assisting clients with design and placement of trade credit insurance in the private insurance market and EX-IM.
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