Trade credit insurance (TCI) is a type of insurance that covers the risk of non-payment by buyers of goods or services. It is a useful tool for financiers who provide funding to businesses based on their trade receivables. In this blog, we will explore how TCI can benefit financiers and what options are available in the market.
Why do financiers need TCI?
Financiers who offer trade finance solutions to businesses, such as invoice discounting, factoring, or supply chain finance, face the risk of default or delay in payment by the buyers of their clients. This can affect their cash flow, profitability, and credit rating. Moreover, if the buyers are located in foreign countries, there is also the risk of political or economic instability that can disrupt the payment process.
TCI can help financiers mitigate these risks by providing them with a reimbursement guarantee in case of non-payment by the buyers. TCI can also help financiers expand their portfolio of clients and offer them more competitive terms and rates. By having TCI in place, financiers can reduce their bad debt provisions, improve their borrowing and financing options, and increase their profitability.
How does TCI work?
- The financier obtains a TCI policy from an insurer that covers the trade receivables of its clients.
- The financier provides funding to its clients based on their invoices or other trade documents.
- The financier pays a premium to the insurer based on the turnover and credit risk of the buyers.
- The financier monitors the payment status of the buyers and reports any overdue or disputed invoices to the insurer.
- If a buyer fails to pay within the agreed credit period due to insolvency, bankruptcy, protracted default, or political risk, the financier files a claim with the insurer.
- The insurer verifies the claim and pays an agreed percentage of the invoice amount (usually 75%-95%) to the financier.
What are the types of TCI policies?
There are different types of TCI policies available in the market, depending on the needs and preferences of the financiers. Some of the common types are:
Whole turnover policy: This policy covers all the trade receivables of the financier’s clients, regardless of whether they are domestic or international. This policy provides comprehensive coverage and simplifies the administration process for the financier.
Key buyers policy: This policy covers only selected buyers of the financier’s clients who represent a significant share of their turnover or pose a high credit risk. This policy allows the financier to focus on its key accounts and tailor its coverage accordingly.
Single buyer policy: This policy covers only one buyer of a financier’s client, who may be a new or strategic customer. This policy enables the financier to enter new markets or sectors with confidence and offer attractive terms to its clients.
Top-up policy: This policy covers only a portion of the trade receivables that are not covered by another TCI policy or credit limit. This policy enhances the existing coverage and allows the financier to increase its exposure to certain buyers.
Who are the leading providers of TCI?
The leading providers of TCI include carriers such as AIG, Zurich Insurance Group, Chubb, Coface, Allianz Trade, and Atradius. The Export-Import Bank of India (EXIM), India’s official export credit agency, also provides credit insurance that protects foreign accounts receivable against insolvency and political risk.
Conclusion
TCI is a valuable risk management tool for financiers who deal with trade receivables. It can help them protect their cash flow, enhance their profitability, and grow their business safely. Financiers can choose from various types of TCI policies that suit their requirements and preferences. To avail TCI, financiers can contact reputed insurers or export credit agencies that offer this service.