Trade credit insurance is growing at a rapid pace as company executives are becoming more knowledgeable about using this highly specialised coverage to reduce risks associated with domestic, export and international sales growth.

The coverage serves as a strategic management tool by protecting policyholders from commercial accounts receivable losses following a customer’s bankruptcy or payment default, or events in overseas markets such as political and turmoil or import, trade restrictions and financial crisis. Policies can be designed to cover domestic receivables, export receivables or both.

Businesses are now making use of trade credit insurance to reduce debt concentration risk, obtain better financing terms and strengthen global credit management procedures.

Trade credit insurance also helps policyholders compete more effectively. Credit terms offered to customers have become an important component of competitive strategy. Credit insurance allows policyholders to gain competitive advantages through extended open terms, aggressive credit limit values and expansion into emerging markets.

The benefits of trade credit insurance are:

• Profit and cash flow liquidity protection.

• Promotes risk avoidance by focusing credit control upon problem accounts.

• More informed position when making commercial decisions to promote sales growth.

• Access to the financial history and credit worthiness of potential buyers.

• Credit management is enhanced as cash flow improved and “days sales” outstanding are reduced.

• Borrowings and other lines of finance are made more accessible/cheaper due to increased Bank security.

• Bad debt reserves can be reduced therefore freeing up capital.

• Longer terms of payment can be offered to “win” a contract.

• Payment solutions can be negotiated to trade a debtor with cash flow problems out of its financial difficulties.

• By the very nature of the pricing and policy structure, the cost of a Trade Credit Insurance policy is definitely less than the cost of the risk.

Alberto Bisazza is director and general manager of KDM Insurance Brokers Limited. He is a registered insurance broker authorised by the Malta Financial Services Authority to carry on business of insurance broking as per the Insurance Intermediaries Act (Cap 487). (www.kdmib.net)