In today’s economy which relies heavily on trade, both local and international, issues such as protracted default and insolvent buyers are ubiquitous. Unfamiliarity with new markets can discourage sellers from extending the credit needed to conduct domestic and international business.
In addition, the risk of non-payments and defaults from suppliers is emerging as a noticeable risk across the globe. A default or non-payment can happen due to several reasons:
- Insolvency of the buyer
- Global economic developments
- Change in domestic trade, trade policies.
- Changes in foreign government regulations
- Political instability
- Willful defaults
Thus, it is essential for businesses to consider credit insurance. A trade credit insurance policy protects a business from a substantial loss. It is possible that one big client defaulting can sink your entire business. Therefore, you need to understand how this insurance works and assess its suitability for your situation.
How Trade Credit Insurance Works?
Trade credit insurance mainly works by safeguarding a business’s cash flow if a debtor defaults on a payment. As mentioned above, there could be many reasons for defaulting.
Unfortunately, these situations can occur from time to time. Credit insurance gives your business a peace of mind so that your cash flow is protected in the event of a non-payment. Without it, you may have to borrow or sell assets to fill the resulting cash shortfall. This situation is quite common, but it is preventable by taking advantage of an insurance policy ahead of time.
Why Should You Consider Trade Credit Insurance?
For a business that takes payment upfront, credit insurance is of no use for them. If your company offers customers with terms of credit, you should consider this coverage as an option.
Although you may not have the scale or need for it immediately, it is better to consider it so you can enjoy peace of mind as you continue to grow. It can even be used by those businesses that trade with international customers. As a risk management tool, credit insurance is an excellent way to protect against risk factors that lie outside of your control. Keep in mind that no business can escape from bad debt.
More than Just Protecting Your Cash Flow:
If you want to operate your business successfully, you need to have confidence in everything you do. Credit and risk management often gets ignored until it’s too late. Most people realize the significance of protecting physical assets, such as property or major equipment, but don’t consider their debtor ledger. By applying for trade insurance, you can gain assurance in your credit management practices.
The Bottom Line
Trade credit insurance is an essential tool that can help cover your company’s receivables and maximize profits over the long-term.
Unlike other insurance policies, this policy can change throughout the policy period, making the relationship between you and the broker quite dynamic.
To know more about trade credit insurance, consult an experienced and well-known insurance broker in the United Arab Emirates.