Trade Credit Insurance: Complete Guide For Suppliers, Exporters, And Lenders

Trade credit insurance protects accounts receivable when a buyer fails to pay. Triggers include insolvency, protracted default, and selected political risks. The policy pays a covered percentage of the unpaid invoice after a waiting period and after you follow the policy rules. Credit insurance can unlock cheaper working capital, raise advance rates, and reduce bad debt volatility. It does not fix weak sales contracts, poor KYC, or unrealistic terms. This page explains how the product works, when it makes sense, and how to buy it without wasting time. No em dashes are used in this document.

Table Of Contents

1. What Trade Credit Insurance Covers
2. Key Exclusions And Conditions
3. Policy Types Compared
4. Buyer Limits, Discretionary Limits, And Cancellability
5. Pricing, Premium Drivers, And Typical Ranges
6. Claims And Recoveries Step By Step
7. Using Credit Insurance With Financing
8. Industry Playbooks
9. Regions And Regulatory Notes
10. Top Providers Compared
11. How To Procure A Policy That Works
12. Implementation And Governance
13. KPIs, ROI Math, And Payback Example
14. Alternatives And Complements
15. FAQ

What Trade Credit Insurance Covers

The policy pays when a covered buyer fails to pay a covered invoice. Core causes include formal insolvency of the buyer, protracted default after a specified waiting period, and, if purchased, political risks that prevent payment such as transfer restrictions or contract frustration linked to government action. Coverage can apply to domestic sales, export sales, or both. The insured interest is your qualifying receivables. The policy does not insure fraud that you could have detected with basic checks, disputes that you cannot resolve, or shipments made in breach of policy terms.

Credit insurance has two practical jobs. First, it reduces P&L volatility from bad debts. Second, it supports financing by improving the quality of receivables in a borrowing base or securitization. Banks understand these policies. They care about limit quality, cancel rights, claims history, and how you operate the policy.

Key Exclusions And Conditions

Every policy contains exclusions. Typical items include sales to sanctioned parties, sales that breach notice rules, sales on terms beyond your approved credit limit or maximum tenor, and losses tied to pure commercial disputes. Most policies require timely overdue reporting and a stop shipment once an account passes a set number of days late. If you keep shipping past that line without written consent, you can void cover on those shipments. Read the conditions. Assign someone to police them.

Policy Types Compared

Buyer Limits, Discretionary Limits, And Cancellability

A buyer limit is the maximum insured exposure you can hold to a specific account. You either request a limit from the insurer or you apply a discretionary limit under conditions set in the policy. A discretionary limit allows you to approve smaller exposures based on your own checks such as credit reports, trade references, and payment history. Use it only within the rules and keep evidence.

Do not confuse cancellability on limits with cancellation of the policy itself. Policies run to the end of term unless you fail to pay premium or commit a material breach. The issue is whether the insurer can pull back a buyer limit for future shipments. Banks care about this. So should you.

Pricing, Premium Drivers, And Typical Ranges

Premium is usually a rate applied to insured turnover or insured exposure. A common range for portfolio policies is 0.15% to 0.80% of insured sales. Single buyer and high risk sectors can run higher, up to 1.2% or more. Indemnity levels of 80% to 95% are common. Deductibles and first loss features are negotiable on larger programs.

Key drivers include sector risk, country mix, average tenor, loss history, concentration across your top buyers, quality of your credit processes, and whether you want non cancellable limits. Clean data and a disciplined process lower price. Weak controls and heavy concentrations raise it.

Claims And Recoveries Step By Step

1. Notice: Notify the insurer when an account hits the overdue threshold or when a buyer files for insolvency.
2. Stop Shipment: Stop shipping unless you receive written consent to continue under specific terms.
3. Documents: Provide invoices, purchase orders, delivery proofs, account statements, and correspondence showing the debt is valid and undisputed.
4. Waiting Period: Wait the protracted default period if applicable, usually 60 to 180 days after due date depending on policy.
5. Indemnity: The insurer pays the covered percentage net of deductible and recoveries. Many policies pay within 30 days after final validation.
6. Subrogation: The insurer steps into your shoes to recover from the debtor. Share any later recoveries per policy terms.

Claims fail when sellers ignore notice rules, keep shipping late accounts without consent, or cannot prove delivery. Keep files tight. Train sales to route exceptions to credit before action.

Using Credit Insurance With Financing

Banks and private lenders like insured receivables when limits are real and the policy is assigned to them. The insurer issues a loss payee endorsement or assignment. The borrowing base then gives higher advance rates on insured receivables, or allows a larger concentration to a single buyer. Insured export receivables can also support forfaiting or securitization.

Example: Advance Rate Impact

Present the policy to your lender early. Provide policy wording, limit list, loss payee endorsement, and a summary of procedures. If the bank underwrites to the policy, do not change terms without consent.

Industry Playbooks

Commodity Traders

Use named buyer or whole turnover with non cancellable limits on your top five accounts. Match policy tenor to shipment plus credit terms plus documentary lag. Coordinate with LC confirmations and collateral management. Watch sanctions and country ceilings.

Manufacturers And OEM Suppliers

Whole turnover with a tiered discretionary limit speeds order intake. Add top up cover for large buyers when the primary insurer caps exposure. Align stop shipment rules with production gates so you do not build for a buyer that is already in breach.

Construction And Building Materials

Policies must handle pay when paid contracts and progress billing. Limit requests should name the parent where possible. Avoid financing receivables that are still subject to punch list disputes.

Wholesale And Distribution

High order volume with many small accounts benefits from strong discretionary limits and automation. Use DSO and aging triggers to control shipments. Capture delivery proofs cleanly for claims.

B2B Software With Invoices

Where revenue is invoiced and not prepaid, a policy can protect high ticket annual invoices. Watch for service disputes. Contract clarity matters more than in pure goods flows.

Regions And Regulatory Notes

In the EU and UK, private insurers and export credit agencies operate side by side. In the US, private markets dominate for short tenor trade. In frontier markets, insurer appetite depends on country ratings, sanctions, capital controls, and legal recovery prospects. If you sell into high risk countries, expect lower limits, higher rates, and tighter reporting rules.

Top Providers Compared

The global market is led by a small group of large carriers with strong data and recovery networks. A capable broker can also structure layered programs and top up solutions. Direct placement is possible for simple portfolios. For bank assignments, pick carriers that your lender already accepts.

How To Procure A Policy That Works

Prepare a clean submission. Include audited financials, AR aging for the last twelve months, your top buyers by exposure, average tenor by market, historical bad debts, current credit policy, and any existing insurance or LC usage. State whether you need non cancellable limits and whether a lender will require assignment. Provide realistic insured turnover. Overstating volume wastes time.

Run a structured quote process. Fix decision dates. Compare indemnity, deductibles, notice rules, overdue triggers, and cancel rights. Ask for specimen policy wordings up front. If you plan to use the policy for bank financing, secure bank feedback on wording before you sign.

Implementation And Governance

Credit insurance fails when it is treated as a side project. Assign a policy owner in the credit team. Document procedures for limit requests, discretionary approvals, overdue reporting, stop shipment, and claims packs. Train sales on the simple rule that policy limits control shipment. Integrate with ERP where possible so buyer limits and aging are visible.

For banked programs, share monthly limit and exposure reports with the lender as required under the assignment. If you change policy terms, notify the bank and secure consent where needed.

KPIs, ROI Math, And Payback Example

Measure impact using a short list of KPIs. Bad debt ratio as a percent of sales. DSO. Advance rate and borrowing capacity. Cost of capital. Premium as a percent of insured sales. Net benefit equals avoided losses plus financing benefit minus premium and admin cost.

Simple model: if your bad debt ratio is 0.6% and the policy with 90% indemnity cuts net losses to 0.1%, you protect 0.5% of sales. On 50 million dollars of insured sales, that is 250,000 dollars. If premium is 0.35% or 175,000 dollars and your financing cost drops by 40,000 dollars from better advance rates, your net gain is 115,000 dollars before admin. That is a clear payback. If your historical losses are already near zero, do not expect magic. In that case the policy is a financing tool or a risk cap, not a profit driver.

Alternatives And Complements

Letters of credit shift risk to the buyer's bank but add cost and friction. Standby letters can backstop payment obligations in selected cases. Factoring and receivables financing can be done with or without credit insurance. Some lenders prefer to underwrite buyer risk directly. Choose the tool that fits the customer, the country, and the margin on the sale.

FAQ

Financely structures, underwrites, and distributes opportunities to banks, non bank lenders, and investors through regulated partners. Financely is not a broker dealer and does not issue securities or letters of credit. Participation is limited to accredited investors under Rule 506(c). Nothing on this page is an offer or a commitment to insure, lend, or invest. All transactions are subject to KYC, AML, and sanctions screening, verification of materials, third party approvals, and market conditions.