Meaning
Insurance policy that protects a supplier against the risk of non payment by a buyer for goods or services delivered on credit. Securing trade credit indemnity allows a manufacturer to extend payment terms to new customers while managing the risk of insolvency. It governs the accounts receivable of the business and stops applying once the debt is paid or written off.
This protection is a standard part of international trade finance.
Default Insurance
Financial protection becomes available when a buyer fails to pay within the agreed terms. Proper trade credit indemnity provides the cash flow needed to continue manufacturing operations after a bad debt occurs.
Credit Limit
The maximum amount of coverage available for a specific customer is determined by an assessment of their financial stability. Setting a trade credit indemnity limit prevents a supplier from overextending their capability to absorb losses from a single large account. This limit is reviewed periodically to account for demonstrated rates of payment and changes in market conditions.
Premium Structure
Financial costs for this insurance depend on the creditworthiness of the buyers and the historical loss rate of the industry. Trade credit indemnity requires the payment of premiums that are typically a small percentage of the total insured turnover. If a manufacturer experiences a low production yield and higher default rates, the cost of the premium increases during the next audit.
