One of the most basic forms of trade credit is accounts receivable insurance or credit insurance. Commercial credit Insurance protects the policyholder if a customer fails to pay due to bankruptcy or financial inability to pay.
Both domestic and international credit insurance policies are available. International credit policies can be purchased with or without political risk. While political risk coverage is more expensive, it can be a worthwhile, especially considering the turmoil in the world today.
Several riders are available to credit insurance policies that provide additional coverage. For instance, some companies offer a 'back sales rider' which would protect the insured for a period of time before the inception of the policy. Other companies offer a 'construed coverage rider' which would prevent a credit limit cancellation from affecting orders that are in process but not yet delivered.
The cost of credit insurance ranges from approximately 20 basis points (.20%) up to 100 basis points (1.00%) on gross covered sales. Some companies will offer an option to purchase the credit limit instead of paying on the gross sales. This is a good option if the company expects to utilize the credit facility for three or more turns through the course of the year.
This type of trade credit does not protect the insured if there is a dispute over the goods. If inspections reveal that the goods shipped do not conform to the specification of the purchase order, the insured will not be paid on the claim.
Many banks and finance companies utilize trade credit to mitigate risk. Many banks will only fund foreign receivables if the customer has a credit insurance policy with the bank listed as the loss payee.
Credit insurance is not expensive and is a great tool for mitigating risk and generating working capital.
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Customized Financing Options
Asset Based Lending
Revolving lines of credit up to $20,000,000
Accounts Receivable Factoring
No minimums, up to $20,000,000
Secondary lines of credit for ABL or Factoring
Equipment & inventory facilities
Great for staffing & temp agencies