Protect Yourself from Customer Default with Trade Credit Insurance

For many small and large scale companies, customer default on goods or services supplied is a real concern. To mitigate the risk of customer default companies will usually operate on a cash-only basis or have stringent credit terms such as requiring buyers to execute letters of credit. Unfortunately, in our economy, many customers/buyers are unable to meet such requirements. The result for the trader is slow sales and restricted access to new markets.

Trade credit insurance solves this problem. With trade credit insurance, you sell goods or services on credit to your customers locally and abroad (export credit insurance) and get compensated in the event that they default on their payments.

How trade credit insurance works.

Advantages of Trade Credit Insurance

There are clear advantages to insuring your business-to-business trade credit transactions against nonpayment by customers, namely;

  • Better sales – with trade credit insurance, you can advance credit to customers at more lenient terms thereby attracting more customers to your product offering.
  • Reduce dependence of a few customers – with trade credit insurance, you can increase the number of customers you rely on and reduce your concentration risk.
  • Bankruptcy protection – with trade credit insurance, you can rest easy in the knowledge that in the event your customers’ default, you can rest easy in the knowledge that the insurance compensation will ensure you don’t have to shut down your business.
  • Professional Advise – trade credit insurers in Kenya often provide their customers with technical advise with regard to credit analysis and portfolio monitoring. Some also offer debt collection services in the event you need them.
  • Greater access to trade finance – banks will typically offer you more favourable credit terms if you have purchased trade credit insurance.

What is Typically Not Covered in a Trade Credit Insurance Policy

  • Disputed debts until the dispute is resolved in favour of the company that is making a claim on the policy
  • Losses arising from changes in exchange rates.
  • If the default is due to any actual or alleged breach of contract by the company making the claim.
  • Any shipments made against payment under a letter of credit, confirmed before shipment, by a bank in Kenya.
  • Physical damage to goods. An alternative cover is available for this risk.
  • Supplies to government bodies, regional and local authorities.

Information Needed for a Trade Credit Insurance Quote

Insurance companies that offer trade credit insurance will typically require the following in order to provide you with a quotation:

  • A description of goods sold or services rendered
  • Type of debtor/s sold to (government, manufacturer, wholesaler, retailer, associated companies, etc.)
  • Whether you want to cover all debtors or just specific debtors.
  • Estimated annual turnover.
  • The average debt collection period.
  • Normal credit terms.
  • History of past losses.
  • Latest debtors aged analysis in a spreadsheet
  • A copy of your company’s latest financial statements

If you would like to find more about trade credit insurance in Kenya, please do not hesitate to request a quote.