What is credit risk insurance?

Protecting Your Business Against Uncertainty

Credit risk insurance is a powerful tool that helps businesses safeguard their accounts receivable against the risk of non-payment. When customers fail to pay due to insolvency, bankruptcy, or prolonged default, your company’s cash flow and profitability can suffer.

Credit risk insurance provides a safety net, ensuring that your business remains financially stable even when unexpected payment issues arise.

The Importance of Credit Risk Insurance for Your Business

In today’s global economy, extending credit to customers is common practice—but it comes with inherent risks. A single unpaid invoice can disrupt operations, strain working capital, and impact growth plans. By securing credit risk insurance, you gain confidence to trade domestically and internationally, knowing that your receivables are protected. This coverage not only minimizes financial losses but also enables you to offer competitive credit terms, expand into new markets, and strengthen customer relationships.

What Is Credit and Political Risk Insurance?

Credit and political risk insurance combines protection against commercial risks (such as customer insolvency) with coverage for political risks that may affect international trade. Political risk insurance shields your business from losses caused by government actions, political unrest, currency inconvertibility, or expropriation in foreign markets. Together, credit & political risk insurance ensures comprehensive protection for companies engaged in cross-border transactions.

Political Risk Insurance

When operating globally, businesses face challenges beyond customer creditworthiness. Political instability, regulatory changes, and geopolitical events can disrupt trade and lead to non-payment. Political risk insurance mitigates these uncertainties, allowing you to pursue international opportunities with confidence.

Key Benefits of Credit & Political Risk Insurance:

Protects against customer insolvency and payment defaults.
Covers political events that impact trade and investment.
Enhances financial security and supports business growth.
Facilitates safe expansion into new markets.

What is a good credit management strategy?

A good credit management strategy can help you minimise credit risk. It involves much more than reminding customers to pay. The most successful strategies assess credit-worthiness of potential and existing customers, as well as potential changes to the political or legal environment, and feature steps to reduce risk

Assess your customers’ credit rating. Does this meet your pre-defined conditions? Ensure contracts include your terms and conditions and details such as the exit period should you wish to cease trading.
Monitor your customers continuously, including obtaining their financials. Take steps to terminate trading relationships once a customer no-longer meets your conditions.
Issue invoices either manually or via an automated system and make sure your bookkeeping system is up to date.
Operate a strong customer relationship management (CRM) system. This can be manual or automated and can form the basis for issuing payment reminders for invoices as well and other customer communication.
Take steps to mitigate your credit risk and protect your account receivables with a tool such as credit insurance.

Mitigate credit risk with credit insurance

Credit insurance, also known as debtor insurance, is an excellent way of avoiding the impact of a bad debt. It is often a strategic credit risk management requirement made by stakeholders or boards of directors.

Trade credit insurance covers your credit transactions so that if your customer fails to pay you, your insurer foots most of the bill. Credit insurance applies to your customer, not the individual transaction, so you only have to do it once and then every invoice is covered within the exposure limit agreed. In addition to trading confidence, you’ll benefit from the due diligence work of your insurer who will check on the credit-worthiness of your customers. Credit insurance is a strategy that can help you grow your business while giving you comfort that you will be paid.

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Other ways to protect your account receivables

Credit insurance is only one way to minimise the risk of unpaid invoices. Alternative approaches include:

Cash on delivery

One way to avoid bankruptcy is to demand payment on delivery. Some potential buyers may be happy with that, but you could lose out if your competitors are offering favourable credit terms. You also run the risk of being saddled with a surplus of unsold stock if your customer doesn’t pay up immediately and you have to hang on to your goods.

Letter of Credit

This is a guarantee from your customer’s bank that they will honour the debt. They can be expensive and contain conditions before being honoured (such as providing evidence of delivery). You will need a Letter of Credit to cover each individual invoice.

Factoring

A factor effectively pays your invoices (minus a fee) in return for the right to collect on them. A benefit is improved cash flow. A negative is that you could compromise the end-to-end personal relationship you develop with your customer.

Self-insurance

With self- insurance, you do your own research on the creditworthiness of a potential customer and the volatility of the market, or pay for an agency to do so. You won’t have insurance costs but you may have to provision for bad debts and will have to take the hit if your customer goes bust or fails to pay.

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Atradius is here to help. Contact us to learn more about our coverage options or request a free, no obligation quote that includes credit reports for your largest trade partners.

What Is Credit Risk Insurance?