As Credit Insurance provides numerous benefits, the questions and their respective answers below will begin to give you a fairly good idea of what a Credit Insurance program can provide to your company.
- What is Credit Insurance?
- How come I’ve never heard of Credit Insurance?
- What is the difference between Credit Insurance and Factoring?
- What will Credit Insurance do for my business?
- Do I have to cover all of my accounts?
- How much credit should I extend to my customers who are covered?
- Will my customers be notified that they are covered?
- Can I exclude certain customers, such as IBM?
- Can I just insure my foreign receivables?
- What is Political Risk Coverage?
- What do you mean when you say that Credit Insurance enhances borrowing power?
- If need be, could you explain this to my banker?
- How much does Credit Insurance cost?
- Is there a deductible and co-insurance?
- How long is the policy term?
- Once in a policy, can new accounts be added during the policy term?
- What is not covered by the credit insurance policy?
- How are claims submitted?
- How long does it take before claims are paid?
- What’s the benefit of using a credit insurance broker?
- How do we get started?
1. What is trade Credit Insurance?
Credit Insurance, which is also known as accounts receivable insurance, or bankruptcy insurance, is a product designed to protect what is most likely your company’s largest asset, its accounts receivable. It covers credit losses caused by insolvencies, bankruptcies, and payment defaults, and in the case of international transactions, political risk events.
2. How come I’ve never heard of Credit Insurance?
Credit Insurance has actually been sold in Europe and the United States for many decades. In fact, 80% of all commercial transactions in Europe are covered under credit insurance. Here in the US knowledge of Credit Insurance has been steadily increasing, especially in view of the global economic meltdown of 2008.
3. What is the difference between Credit Insurance and Factoring?
Factoring is the process in which your receivables are actually purchased by a factoring company who takes ownership of your receivable. Credit Insurance is not lending you any money but only insuring your receivable in the event of a payment default or bankruptcy of your customer.
4. What will Credit Insurance do for my business?
Great question. Credit Insurance will help your company in several areas:
- Protects Against Catastrophic Loss. The main function of Credit Insurance is to protect your receivables against the rare, but highly catastrophic loss due to payment default or bankruptcy of one’s customers.
- Provides a Safety Net to New Markets. Whether your new customers are domestic or international, credit insurance allows you to cross borders safely without worrying about the language, laws, or cultural differences of doing business in foreign countries.
- Enhances Borrowing Power. When banks or other financial institutions loan against insured accounts receivables, they are encouraged to increase the advance rate and lower the interest rate. In particular, banks are encouraged to include overseas receivables in the borrowing base when they are insured.
- Compliance with Sarbanes Oxley. The credit investigation and verification of the credit insurance carrier of an insured’s accounts receivable portfolio assists in fulfilling the transparency requirement under Section 404 of SOX.
- Assists in Establishing a Guide for Effective Credit Risk Management. Without question, Credit Insurance greatly strengthens a company’s credit risk management system by initially verifying the credit worthiness of your present and new customers and protecting you in the event of a payment default or bankruptcy accordingly.
5. Do I have to cover all of my accounts?
No. You are able to “slice and dice” your accounts to cover only your top ten customers, domestic customers, or overseas customers. The first step is to identify where the risks in your customer base exist. Once we identify the risks we can then adapt the credit insurance coverage, terms, and conditions to accommodate those risks.
6. How much credit should I extend to my customers who are covered?
The amount of credit that should be extended will be in line with your normal or projected periodic sales activities to that customer, in conjunction with the amount of credit that will be approved by the credit insurance carrier. If you are intending to sell approximately $500K to a customer on a regular basis and the insurance company is able to insure you up to that amount, then your credit limit will be $500K.
7. Will my customers be notified that they are covered?
No. The nice thing about Credit Insurance is that they will not know that they are covered. You continue to do the selling, invoicing, and collection as usual. In addition, the receivables are not assigned nor are there any liens, UCC filings, or other encumbrances.
8. Can I exclude certain customers, such as IBM?
Of course. If in your accounts receivable portfolio you have customers that are “blue chip” companies then through a special endorsement we can exclude these kinds of customers.
9. Can I just insure my foreign receivables?
No problem. Policies can be written to only cover your overseas accounts. Not only will they be covered for payment default or bankruptcy but for political risk as well.
10. What is Political Risk Coverage?
Political risk coverage mitigates the risk of non-payment by your overseas customer due to certain actions by the overseas government such as:
- Breach of contract risk: The breach of a contractual obligation by a foreign government or state-owned entity and the ensuing refusal by the government its obligation to you.
- Non-payment by a sovereign obligor: The refusal or inability of a foreign government to make scheduled loan payments or to make a payment under a guarantee.
- Expropriation risk (including gradual or creeping expropriation): An act or a series of acts taken by a foreign government to seize, confiscate or otherwise expropriate your assets or investments, or foreign government acts that have had the effect of expropriation.
- Political violence risk: Terrorism or other forms of political turmoil aimed at influencing the policies of the host country government that damage assets or force you to shut down foreign operations.
- Conversion risk: The inability to convert the local currency of a foreign country into hard currency.
- Transfer risk: The inability to transfer hard currency outside a foreign country.
- Repossession risk: Measures that a foreign government may take that prevent you from repossessing or re-exporting physical assets brought into the country (e.g. machinery, equipment, rolling stock, an aircraft, etc).
11. What do you mean by Credit Insurance enhances borrowing power?
When banks or other financial institutions loan against insured accounts receivables, the risk of a receivable loss is greatly decreased since ultimately the credit insurance carrier will pay for the loss. As a result of making the portfolio more risk proof, banks are encouraged to increase the advance rate and lower the interest rate. In particular, banks are encouraged to include overseas receivables in the borrowing base when they are insured.
12. If need be, could you explain this to my banker?
Our pleasure. Many bankers have heard of Credit Insurance but don’t always have a good handle on the mechanics. We have often explained the concept of Credit Insurance and how it integrates with the collateral and loan process, which in turn has resulted in the loan transaction being completed for our clients.
13. How much does Credit Insurance cost?
The cost of Credit Insurance varies and is based on a number of factors including: The client’s historical loss experience, location of the buyers (domestic or overseas), the number of buyers being insured, and the amount of coverage being requested. As a “ballpark” estimate, the typical annual premium is approximately .1% – .2% of the estimated annual sales of the covered accounts.
14. Is there a deductible and co-insurance?
Many policies are structured with a one-time annual aggregate deductible. After the deductible is used up, it is not applied to any future claims. Co-insurance is often suggested as a way to reduce premium costs but in the end it all depends upon the needs of the insured.
15. How long is the policy term?
Most policies are for one year but two-year policies are also available. Two-year policies have the advantage of keeping the premium rates the same during the two-year period.
16. Once in a policy, can new accounts be added during the policy term?
Yes. All the credit insurance carriers have an online system in which you can request to add new customers, increase or decrease present coverage, or cancel coverage on a particular customer. All you need to do is to provide the account name, address, and phone number. Most requests are typically answered within two business days.
17. What is not covered by the credit insurance policy?
Disputed invoices. An invoice must be found to be a legally sustainable debt for the amount to be covered under the terms of the policy. What this means is that a judgment in favor of the insured must first be obtained and then the invoice will be covered for reimbursement under the policy.
Claims are submitted on a simple one-page notification of claim form along with invoices and other relevant documents to the credit insurance carrier.
19. How long does it take before claims are paid?
For claims based upon a formal bankruptcy, the settlement period is between 30-45 days. For claims based upon a payment default, settlement is between 60-90 days for domestic claims and 90-120 days on overseas claims.
20. What’s the benefit of using a credit insurance broker?
Firstly, a credit insurance broker is experienced in the ins and outs of the product. Most property and casualty insurance brokers usually do not know how credit insurance works and its important to only work with a credit insurance broker who has a in-depth experience with the product.
Secondly, a credit insurance broker is working on your behalf to obtain the best policy, with the best coverage at the best rates. In addition, since the credit insurance broker is working on your behalf he is able to smoothly assist your company with claim processing and other issues that may arise during the course of the policy period.
21. How do we get started?
Now you’re cooking! Contact us by our inquiry form or by phone to begin the credit insurance proposal process.