Trade credit insurance: What is it, and what do you need to know?

Trade credit insurance protects businesses operating internationally.

It's common to purchase insurance that deals with specific and dramatic circumstances such as theft or property damage, but just as important is insurance that protect against financial issues. One of the most common forms of this is trade credit insurance, which provides a safety net to businesses in the event of a client failing to pay a debt.

So what do Australian businesses need to know about trade credit insurance?

In this article we will explain:

  1. The definition of trade credit insurance.
  2. What makes a good trade credit insurance provider.
  3. Types of trade credit insurance policies available.
  4. How to minimise risks.

Trade credit insurance (TCI) is a broad form of coverage that protects against bad debts, and unpaid invoices in particular.

What is trade credit insurance?

Trade credit insurance (TCI) is a broad form of coverage that protects against bad debts, and unpaid invoices in particular. As with other types of insurance, TCI allows businesses to make a claim in the event of a client refusing to honour their debt, resulting in a payment that covers some or all of the money owed. This can be particularly useful to Australian companies operating overseas, where they may not have as much information as they'd like on potential trading partners and the risks associated with them.

While non-payment of a debt can often be down to a debtor's inability or unwillingness to honour the initial agreement, there's also a wide variety of other situations where TCI can come into play. For example, if an Australian business is exporting a product to a region with political risks – such as the potential for an outbreak of war – TCI makes it possible to secure a payout from an insurer even if the initial client can't be reached or is unable to provide payment.

Although every business operating internationally should have a comprehensive trade credit insurance policy, the risks are significantly greater for SMEs. This is because any interruptions to cash flow can make it difficult to secure materials and continue operating, leading in worst-case scenarios to bankruptcy. Accordingly, small business owners should be particularly aware of the value of TCI to protect their organisations' accounts receivable.

What makes a good trade credit insurance provider?

When selecting a TCI policy, businesses should start by identifying a provider with the track record, expertise and international reach necessary to meet their needs. This is particularly true within the Asia-Pacific region (APAC), where differences in language and culture can make even the smoothest of trade dealings a stressful process.

Here at Coface, we pride ourselves on having the skills and contacts needed to succeed in the APAC region, with over 20 years of experience working within the area. In addition, we have offices in 13 different APAC markets, including:

  • Australia
  • China
  • Hong Kong
  • India
  • Indonesia
  • Japan
  • Korea
  • Malaysia
  • Philippines
  • Singapore
  • Taiwan
  • Thailand
  • Vietnam

This experience and scope makes us the perfect team for Australian businesses looking to tap into everything the Asia-Pacific region has to offer.

The best type of trade credit insurance cover for a particular company can vary significantly.

What are the types of trade credit insurance?

As the needs of each business are slightly different, the best type of trade credit insurance cover for a particular company can vary significantly. A few factors to take into account when selecting a policy include the countries being exported to, how much information a business has on its clients' credit history and other financial factors such as annual turnover.

Here at Coface, we provide a range of different TCI policies that are tailored to the individual needs of various-sized businesses. These include:

  1. EasyLiner for SMEs. This product is specifically designed for small-to-medium businesses operating both within Australia and internationally. Typical turnover for this type of TCI is between AU$750,000 and $5 million.
  2. TradeLiner for mid-sized enterprises. TradeLiner provides a slightly more comprehensive level of protection for businesses with diverse international interests, offering stability against commercial, political and environmental risk. It's best suited to companies with an annual turnover of AU$7 million or more.
  3. Coface Global Solutions (CGS) for multinationals. This product is tailored for companies with larger clients across multiple countries, operating with higher turnovers and increased levels of risk. CGS is designed to offer flexibility in order to account for the trading differences that can arise between different regions.

In addition to these set types of trade credit insurance, Coface's Single Risk solution is available for one-off projects. The flexibility of a Single Risk solution makes it easy to tweak a TCI policy based on the particular risks and challenges of a certain market or industry.

Each of these policies is designed to best suit the needs of particular businesses, reducing the risk of unpaid debts impacting cash flow as much as possible. To further narrow down the options and ensure you fully understand the trading risks faced by your business, it may also be a good idea to request a Customised Credit Opinion. This involves a full assessment that will provide a comprehensive analysis of the risks of non-payment associated with your customers, making it far easier to select an appropriate TCI policy.

Minimising risk beyond trade credit insurance

While TCI is a firm line of defence against non-payment, it's not the only way businesses can protect themselves when trading internationally. Just as important is to go into any deal with an overseas buyer having a firm understanding of not only their credit history, but also any other factors that may affect trade credit terms and repayments.

Two great examples of this are political and geographic risks, such as the possibility of war breaking out or a natural disaster occurring. These sorts of events are outside of any trading partner's control, but may still affect their ability to pay off any debts. Accordingly, Australian businesses should ensure they have as much information as possible on any external factors in order to avoid potentially risky trade partnerships.

Coface is able to provide in-depth analysis on potential trading partners and whether or not they'll be a good fit.

Here's why you should choose Coface

In addition to providing trade credit insurance services and Customised Credit Opinions, Coface also helps Australian businesses exporting overseas by providing experience and expertise.

This starts before any trade agreements are signed, with our team able to provide in-depth analysis on potential trading partners and whether or not they'll be a good fit. Of particular importance is the credit history of any clients an exporter is considering working with. If our team identifies any red flags, we'll be able to provide a comprehensive report on the associated risks, allowing business owners to make an informed decision on whether or not to proceed with trade.

We'll also identify any potential issues unrelated to the financial side of the equation in order to provide a full picture of a potential trading partner. These potential issues can include war or natural disasters, as we discussed earlier.

Finally, Coface provides comprehensive global debt collection services, in the event of an unpaid debt being retrievable. In these situations, our team may be able to recover what's owed without having to go through the full claims and indemnification process.

All of these varied services, from trade credit insurance to debt collection, are designed to help Australian businesses trade overseas with confidence. To find out more about how we can help your company trade safely, get in touch today.