Protection against bad debts
Over a period of time all businesses incur unexpected bad debts. Its almost unavoidable. The smaller debts are managed and traditionally treated as " part and parcel of doing business", however, large unexpected losses can be devastating and in some instances lead to the insolvency of your own business.
Trade credit insurance protects your accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.
It is also an effective risk management tool that can:
- Protect and improve your cash-flow - which is literally the "lifeblood" of all businesses big and small.
- Enhances your balance sheet and reduces the cost of finance.
- It can help increase your sales and profitability.
- Improve and strengthen your credit control and management.
Types of Policies Available
Knowing what type of policy your business needs is essential. The 3 common forms of policies are Whole of Turnover, Selective Risks and Catastrophe.
- Whole of Turnover: The underwriter contracts to cover all receivables.
- Selected Risks:(Major debtor - Datum Line)The underwriter contracts to cover the major accounts, over an agreed balance.
- Catastrophe: - (Aggregate First Loss) The underwriter contracts to cover all receivables subject to a sizeable level of self-insurance.
Calculation of Premium
The premium rate is a percentage amount, based on insured turnover, which would exclude sales to Government, cash sales, taxes, inter-company business and mutually excluded debtors.
The underwriters take into consideration the following, when calculating the premium rate:
- Insurable turnover;
- The type of industries your business trades with;
- The number and amount of bad debts over the last 3 years;
- The credit control procedures in place, and
- The credit worthiness of the larger debtors and the limits required.
The premium rate is negotiated with the underwriters and can be varied by the size of the excess and the percentage cover.Typically, higher self-insurance lowers the premium rate.