In order to ensure the perception of its turnover which is the main objective pursued by a commercial exploitation, the company is constantly in search of ways and means that will enable it to protect itself effectively against the risks of unpaid customers . One of the main factors of this risk is undoubtedly the 30 or 60 day payment term agreement.
In order to mitigate this risk factor, many techniques are accepted by companies. Some of them avoid at all costs selling on credit by only allowing sales in cash or payable in advance. But, it is not always possible to sell exclusively without granting payment terms. What are the possibilities open to the company?
Fortunately, a solution of choice of offer to them with credit insurance.
What is credit insurance?
Credit insurance is a cover that is offered by insurance companies to companies that conduct commercial transactions, to protect them against the risk of delinquency. Credit insurance can be entered into by the company to insure all its trade receivables or to hedge on specific or individual transactions.
Credit insurance allows a company that is subject to non-payment of one or more of its trade receivables to receive a compensatory indemnity from the insurance company with which it subscribes. This indemnity partially covers the amount of the outstanding payments at a rate which varies according to the insurance companies and which can go up to 90%.
The arrangements for executing credit insurance differ from one organization to another or from one country to another.
To know : Factors systematically put in place a credit insurance when a company chooses factoring, which allows them to guarantee the receivables.
What are the risks covered?
The risks covered by credit insurance can be classified into three categories: commercial risks, political risks and currency risks.
- Commercial risks include the risks of insolvency of the debtor and lack of payment (that is, non-payment without insolvency). If the lack of payment is due to a dispute of the claim, on the part of the customer, the compensation is not collected until the problem is solved.
- Political risks include risks of instability, natural disasters or economic conditions.
- Monetary risks , in turn, refer to currency risk, that is, the risk that adverse exchange rate fluctuations in foreign currency transactions will result in a write-down of the receivable.
Of course, credit insurance only covers risks and not proven situations. Thus, if the customer was already bankrupt before there was the sales agreement or if the political instability was already installed, the company will not be entitled to compensation.
The benefits of credit insurance
Credit insurance has many advantages for the company :
- The first of these is that it ensures the recovery of a large part of its unpaid claims. Generally, if the company must negotiate the rates of coverage of its outstanding so that it can obtain that the compensatory indemnity covers at least, the costs of purchase and distribution. A fortiori, credit insurance is a tool that helps ensure the business continuity of the company.
- Another advantage of credit insurance is that it allows the company to better manage its credit risks by giving it the opportunity to anticipate them.
- Finally, credit insurance also helps the company achieve its planned sales objectives and balance its financial structure by preserving one of the key assets that are healthy receivables. This will help the company in its future solicitation of competitions and financing from credit institutions.