Trade Credit Insurance FAQs

Trade credit insurance provides your business with protection against the failure of a customer to pay their trade credit debts. This can arise as a result of your customer becoming insolvent or because your customer fails to pay within the agreed credit period. These risks are referred to as 'commercial risks'. The protection covers, as standard, goods or services sold and delivered, but can be tailored to cover many other risks such as work in progress and binding contracts.

Companies of all sizes use trade credit insurance. There are credit insurance solutions which suit the needs of the micro SME company up to the largest multinational company.

It is the undisputed whole turnover that is insured. This will be less VAT, sales to any government body and intercompany trading. It will also exclude any pro-forma invoicing and other non-credit transactions, as well as customers where the insurer has refused to underwrite a credit limit.

Insolvency and protracted default which is non-payment of any sales invoices raised on a trade credit basis. Political risk cover is available on “export” policies.

The cost of a credit insurance policy is directly linked to the risk to which your business is exposed and is related to the amount of turnover that you wish to insure. It varies in relation to where your customers are located, your business' track record in credit management, the nature of your customers and the trade sector in which you trade.

Some insurers will charge for credit limits, administration and debt collection services. However, these charges are not applied by all insurers. Premium attracts insurance premium tax (IPT) and other charges attract VAT.

Credit insurance policies can be negotiated for 12 or 24 months. In exceptional circumstances some insurers may agree to a period of more than 12 months if there is justification for doing so. E.g. so that the policy falls in line with the financial year-end.

Credit insurance will protect your cash-flow, whereas factoring or invoice discounting will recourse the debt back to you, in the event of non-payment by the debtor. Factoring and invoice discounting may give the impression that the cost is lower than credit insurance. However, you have to make sure the draw down values are met, otherwise penalty charges apply. It is possible to obtain cover from the insurer to secure your factoring or invoice discounting.

Insolvency is where a company has no money to pay its creditors in full and has had to seek protection from its creditors, through the court.

This is where the buyer is in default due to non-payment of their contractual obligations and where there is no valid dispute between the parties. Normally at this stage you would have issued court proceedings or passed the debt to a third party debt collection agency.

The risk that a government buyer or a country prevents the fulfilment of a transaction, or fails to meet its payment obligations, or the risk that is beyond the scope of an individual buyer or falls outside the individual buyer's responsibility. Insured perils include contract frustration, contract cancellation, export restriction and import restriction.

Costs incurred by the policyholder between the date of the contract of sale and the agreed delivery date for which the buyer is not normally liable under the contract of sale. They normally exclude overheads, profit and damages for breach of contract but can include:

• raw materials
• direct labour costs
• preparation of goods prior to the physical manufacturing process
• purchase of goods by the policyholder for onward sale to the buyer
• work in progress costs incurred in manufacturing
• stock awaiting delivery
• pre-paid delivery costs

Insurance premium tax. This is a levy that the UK government sets.

Your customer with whom you trade with and is the subject of a credit limit endorsement to your policy.

The maximum amount that the insurer is liable to pay in respect of all losses during a policy period.

Each policy has a maximum liability. This will be set in line with the size of your business and should not be disproportionate to the level of cover required.

All commercial customers who are given credit terms can be insured, subject to justification for the level of cover required.

On average, the level of indemnity is 90% but this can vary, depending on the type of policy you choose or on your specific requirements. Policies can also carry an excess which is normally deducted before the indemnity is applied.

The insurers have an online platform in order to process credit limit requests.

All of your commercial customers can be covered subject to you holding justification for the credit value on their account and you comply with all the policy conditions.

This is the way that you have calculated your credit limit. If it is from the insurer then that is a definitive decision.

The criteria set will depend on the particular insurer involved. Most insurers will allow you to use recent payment experience and/or financial credit information reports, recommending a specific level of credit.

Not immediately – when an insurer withdraws cover as a result of adverse information, you will not be able to use your discretionary limit justification to advance additional credit. However, some insurers will allow the discretionary limit to be reinstated after either renewal of the policy or 12 months, depending on the insurers’ wording.

Yes, it should be possible to obtain cover on a sole trader if they have been trading as a commercial company. The same applies to partnerships.

Yes – we can supply financial credit information reports from a number of different sources, at a price which is negotiable. We offer a “pay as you go” service so you are not locked into a long-term contract.

All insurers provide an online platform for monitoring and applying for credit limit approval. Some insurers also provide online access to monitor claims and overdue accounts.

You must advise the insurer of any overdue accounts which remain outstanding beyond a specified period, after the due date and/or any related adverse information.

Like with all insurances, there is a dedicated claim form to complete. You will also be asked to accompany it with relevant original documents to support your debt and any activity to mitigate your loss. You are obliged to disclose all pertinent information. There is also a time limit in which you can submit a claim.

Claims will be paid within a maximum of 30 days, in the event of an insolvency (provided the insurer has received all of the necessary paperwork). The timescale on protracted default claims does vary but is generally within 6 months of the original due date. You are expected to take all normal commercial procedures to mitigate your loss.

Up to 90% of the VAT exclusive, unpaid balance, after deducting any policy excess.

Yes – provided you have justification for the credit which you advanced and have complied with the policy terms and conditions.

The most common reasons for claims being refused are a lack of justification for the credit advanced and failure to inform the insurer of the non-payment, within the specified timescale. As with any insurance, you are expected to be honest and disclose all relevant information.