Reduce Customer Bad Debts with Credit Insurance

When you sell to a new overseas customer, do you worry that you’ll get paid in a timely fashion, or worse yet, will the client pay at all? How do you quickly obtain high quality, reliable credit information about a company in a small, foreign country before you ship the goods? The answer lies with credit insurance. Used extensively in Europe for years, credit insurance is now being used more often by U.S. businesses in overseas and even domestic transactions.

Credit insurance is also known as accounts receivable insurance, bad debt insurance or credit risk insurance.  The types of risks covered by credit insurance involve non-payment by buyers due to insolvency, slow payment after delivery is made and for losses that resulted from a customer becoming insolvent before delivery of goods or completion of contract, but after the goods had been produced and shipped.

During times of economic downturn or gradual expansion, credit insurance provides an extra layer of protection for your company’s growth, and helps to calm nervous lenders. Often, the credit insurance policy can be used to reduce the cost of a loan, as it is almost a certainty that revenue from a specific source will be forthcoming.

Credit insurance may enable you to sell more goods on credit terms while substantially reducing the overall risk of exposure due to non-payment. It also may enable you to take advantage of peak and cyclical selling periods and to safely expand into new product lines or territories.

Generally, it is recognized that 20% of a company’s customers account for 80% of sales. Credit insurance protects against the devastating loss resulting from the insolvency of one of your key accounts. A credit insurance contract can insure your entire accounts receivable or be custom tailored to cover just your key customers. Lenders recognize that the insolvency of a company’s key customer may jeopardize repayment of a loan. Credit insurance reduces this risk.

Credit insurance usually costs a fraction of one percent of insured sales and premiums are based on the type of business, annual sales, loss experience and countries where goods are sold. Letters of credit, an alternative to credit insurance, are more costly and can tie up your credit lines.

Premiums for credit insurance can be factored into your export prices. Buyers are often willing to pay the credit insurance premium, since your credit terms are probably more feasible than a buyer arranging financing from a bank in the foreign country.

Once a credit insurer accepts your account, it will investigate the credit background of your customers using data from banks, trade organizations, government agencies, credit and rating groups, and from its own extensive files. It will also examine your company’s sales, credit history and shipment methods.

The detailed data and information provided by credit insurers can support your decision to establish credit limits for your customers. Sales to some foreign countries that have been designated by the government as “high risk” are not eligible for insurance, but these banned countries are small in number and change frequently.