Trade credit insurance (TCI) is one of the most effective ways for Australian exporters to protect their business operations from unseen issues with cash flow, unpaid invoices and bad debts. However, many organisations don’t understand how TCI can protect them, or what the benefits the various types of trade credit insurance can offer.
This confusion can lead to businesses failing to take out the right type of policy, or operating without any form of trade credit insurance at all. So, how does trade credit insurance work, and what are its benefits to you and your company?
Trade credit insurance protects your business against fluctuations in cash flow caused by bad debts.
1. TCI improves cash flow
The first and most important reason to take out a trade credit insurance policy is that it protects your business against fluctuations in cash flow – specifically, those caused by bad debts and unpaid invoices. Without TCI, these can have a significant impact on the amount of money coming through a company, leading to all sorts of difficulties that range from being unable to purchase materials all the way through to effects on payroll. In more serious situations – and particularly for small businesses with tight cash flows – unpaid invoices can lead to bankruptcy or insolvency, making it incredibly difficult for a company and its owners to bounce back in the future.
With trade credit insurance, businesses have a safety net, thanks to the indemnification of unpaid debts. This ensures that even if a particular client continually fails to pay what they owe, a business will still be able to operate as if they’d been paid, while pursuing the debt through legal or other means.
2. TCI provides access to credit expertise
While trade credit insurance is a great way to counter the impacts of unpaid invoices, it’s always better to avoid bad debts in the first place. This is another area where the right TCI policy and insurance company can assist, by providing you with access to in-depth information on businesses and markets that you otherwise wouldn’t be privy to.
These risk assessments make it far easier to identify which organisations or individuals are more likely to leave your organisation with bad debts, allowing you to either set strict credit terms or decline their business altogether. For international trade in particular, where exporters often need to deal with companies they don’t know very well, credit expertise can be a lifesaver, avoiding risk and ensuring all accounts receivable are paid on time.
When taking out a TCI policy with Coface, businesses also gain access to a professional financial assessment of each customer. This means that even if a long-term client has a good track record of paying their invoices, you’ll still be able to know for sure whether or not there’s any risk of non-payment in the future. These assessments also factor in political risk, meaning that if you have a trading partner that operates in a turbulent part of the world, you’ll know if there’s any risk of the relationship falling through due to external factors – leaving you with irretrievable accounts receivable.
A lender is far more likely to see your company as risky if you don’t have trade credit insurance in place
3. TCI can help grow your business
Debt indemnification and credit expertise are the two benefits most closely associated with trade credit insurance, but the right trade credit insurance policy can benefit a company in other ways as well. One of the most significant is the ability to access better rates when applying for a business loan.
A loan could be to purchase materials, a new piece of equipment, or even larger premises, but regardless of your financial goal, a lender is far more likely to see your company as risky if you don’t have trade credit insurance in place, and you’ll pay a premium as a result. Accordingly, by taking out TCI and making sure to work closely with a credit risk specialist, you’ll be able to prove to lenders that your business has a consistent cash flow, and is more than able to pay back a loan.
Now that we’ve covered the benefits of trade credit insurance, and how these types of policies work for Australian exporters, the question becomes: Which policy is best for you? Here at Coface, we offer various types of TCI that are designed for businesses of different sizes. This means that regardless of whether you’re working in an SME or an international enterprise, there’s a Coface policy that can offer the very best level of protection, keeping your business running smoothly and helping minimise the risk of bad debts and impacted cash flow.
To find out more, get in touch with the Coface team today.