As a part of their routine business activities, many company owners grant payment terms to their clients on an everyday basis irrespective of the enormous risk this lending entails. However, considering the volatility of the trading industry around the world, there are always high chances of the customers defaulting on their payments or their businesses shutting down. In case this worst case scenario comes true, then it is imperative for you to be prepared to tackle the financial implications stemming from these losses - and this is where Trade Credit Insurance
comes to the rescue!
Bankruptcy, insolvency, or political instability in nations where the trade partner operates, which may include the insured business owner’s own country too - are some major factors that may trigger the credit customers’ inability to pay. A prime example could be the rise in insolvency cases across the globe after the advent of the COVID-19 pandemic and the subsequent lockdowns worldwide. During the pandemic, there occurred a contraction of -8.5 percent in the international trade volume, with India’s real GDP growth rate shrinking by 7.3 percent and credit growth decelerating further to 2.5 percent in the financial year 2020-21. (Source: Firstpost
) Even now as of June 2022, there were a total of 1,999 ongoing cases of corporate insolvency in India, as per government reports. (Source: Business Standard)
Yet another example on the international level could be the economic consequences of Russia’s invasion of Ukraine early this year, which has left the latter on the brink of bankruptcy and companies from both countries left with colossal dues. Devalued considerably at 37 hryvnia for 1 US dollar as of June, Ukraine’s sovereign debts are trading at as low as 17 cents on the dollar - which is a fraction of their face value. (Source: Aljazeera
While these examples make it aptly clear how important Trade Credit Insurance is for businesses to sustain in such unpredictable circumstances, following are 6 reasons that will convince you about its necessity:
1. Clients getting bankrupt
As mentioned earlier there are numerous factors that can lead to bankruptcy, making it the grim reality of the modern business world. When your client becomes bankrupt, making a full collection on the invoice will be a herculean task. Majority of the banks being fully aware of this encourage customers to invest in a Trade Credit Insurance, as this commercial insurance policy grants them the surety as well as the confidence to lend to the said customer.
2 .Issues arising in foreign trade
Be it cultural or communication issues or cancellation of permits due to unforeseen reasons, there are several hurdles which may arise while carrying out international trade that may prevent or cause delays in payment. When there is a disruption in global trade events, it may be because of international politics, currency issues, governmental interference, etc. This can impact the payment owed to you by your customers, therefore trade credit insurance can provide assistance in such a situation.
3. Analysing the financial stability of potential customers
Organisations must be capable enough to analyse the financial stability of potential customers in an extensive yet quick manner, to be able to make the most out of any business opportunity for high sales. However, a Trade Credit Insurance policy can provide access to large information databases which can be helpful to assess the solvency, trading history, risks and overall viability of a customer. This feature is beneficial to monitor critical accounts without the need of an in-house team for the same.
4. Gaining a competitive advantage
This commercial insurance
can lend a significant competitive advantage to your company, giving it an edge over its rivals and putting it in a better position to offer a lucrative limit to its buyers. It allows you to match your rival’s credit limit and payment terms, ensuring that your company has a greater chance of getting the business.
5. Contributes to organisational alignment
A trade credit insurance policy promotes organisational alignment by bridging the gap between two key departments that are usually at odds with one another - the credit department and the sales department. When the credit monitoring and evaluation work is handled by the insurer, it enables organisations to get their account receivables and collection department streamlined. As a result, it creates a stable, conducive environment for marketing and sales teams to explore international markets.
6. Promotes financial stability
Receivables take up a major portion of the balance sheet assets of a majority of companies. However, while most of the organisational assets like inventory, equipment, etc. are insured, receivables are often not. Receivables have a significant impact on a business’s cash flow and also determine how financially viable it appears through the perspective of investors and banks. Trade credit insurance completely secures a company’s receivables, thereby helping it achieve better financial terms and lower rates of interest. It can also aid in preventing huge bad debt losses as well as contribute to eliminating or reducing the bad debt reserve.
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