Trade Credit Insurance almost an unknown subject before the financial meltdown of 2008, became a much sought-after insurance product as the meltdown started and continues to be so. Given the current precarious scenario globally where it is not the private corporations but States themselves under question. Should there be another trigger, bailouts will be virtually difficult to come by this time and its effect will be felt by almost every segment of the world economy.
This note attempts to explain the importance of Trade Credit Insurance, its relevance and how companies can benefit from this product.
While, companies buy products to cover assets such as plant and machinery, goods in transit and employee benefits products, etc., products that covered tangible assets or products that are required due to statutory mandates “Receivables”, one of the large constituents in a firm’s Balance Sheet, appearing under Current Assets is often ignored. It is assumed that goods/services once sold will be paid for, however, this accepted norm was challenged during the financial crisis and companies started looking for solutions to ensure cash was received for goods/services sold.
Trade Credit Insurance helps companies to secure them against
The policy pays for all undisputed non-payments beyond the waiting period, where the Insured would have sold goods or services and payments are delayed or not paid at all.
Credit Insurance also indemnifies the insured against its buyers going bankrupt and pays for the receivables.
In the event, the buyer is willing and capable of paying, but due to political conditions in his country the buyer is unable to remit the funds outside his country, the policy is triggered and the insured is indemnified.
While the above may sound simple, but since, it involves trade between two companies based in the same country or in two different countries, it can get quite complex. The complexities add up due to the fact that trade is always evolving and it involves people with different interests to have a common understanding to make it work. One must be careful about commercial and technical aspects during business negotiations since trade disputes if any are not paid as claims under Credit Insurance and all such claims are suspended until there is an arbitration/court verdict in favour of the seller / insured.
Ideally, this cover is suited for companies with sales turnovers more than Rs. 20 to 50 crores. One may choose to cover either Exports or Domestic sales or both.
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