It is also called credit insurance or accounts receivable insurance, and export credit insurance when it covers customers abroad. The policy insures money customers owe for goods or services already delivered, so it works alongside your own credit control rather than replacing it.
What trade credit insurance covers
- Insolvency. The customer enters a formal insolvency procedure, such as administration or liquidation in the UK or bankruptcy in the US, and cannot pay.
- Protracted default. The customer is not insolvent but still has not paid. The policy sets the collection steps you must take first, and a waiting period of up to six months usually applies before a claim is paid, according to ICISA, the international association of credit and surety insurers.
- Political risk. For customers abroad, events such as currency transfer restrictions or expropriation that stop payment.
Policies usually exclude debts the customer disputes until the dispute is settled, sales above a customer's insured limit and deliveries made after the insurer reduced or cancelled that limit.
How a trade credit insurance policy works
- Choose the cover. A whole turnover policy insures sales to all or most customers and is the most common type. Key account and single buyer policies cover named customers only.
- Get a limit for each customer. You apply for a credit limit, and the insurer approves it in full, approves a lower amount or refuses. Within an approved limit you can trade without asking again, and the insurer can reduce or cancel the limit for future deliveries.
- Pay the premium. It is usually a percentage of insured turnover with a minimum premium. The rate depends on your sector, your bad debt record, where your customers are and how much cover you buy.
- Report overdue accounts on time. Policies set a deadline for telling the insurer about invoices that stay unpaid, and missing it can cost you the cover for that customer.
- Claim. After insolvency, or after the waiting period for protracted default, the insurer pays the insured percentage of the loss and may take over the right to recover the debt.
Trade credit insurance example
Example. A distributor insures its sales under a whole turnover policy that pays 90% of insured losses. The insurer approves a £60,000 limit for Kestrel Fittings. When Kestrel Fittings goes into administration, it owes £75,000. The claim is based on the £60,000 limit, so the insurer pays 90% × £60,000 = £54,000 and the distributor carries the other £21,000. A policy excess or first loss amount would reduce the payout further. All figures are illustrative.
The uninsured £21,000 ends up in bad debt expense, which is why the limit you ask for should cover what the customer really owes at its peak, not its average balance.
Trade credit insurance vs factoring
| Point | Trade credit insurance | Invoice factoring |
|---|---|---|
| What you get | A share of the loss if an insured customer does not pay | Cash for invoices soon after you issue them |
| Who chases customers | You do | Often the factor |
| Main cost | A premium based on insured turnover | Fees plus interest on the money advanced |
| Bad debt risk | The insurer carries the insured share | Stays with you under recourse factoring |
The two can work together. Insured receivables can make it easier to raise finance against invoices, and non-recourse invoice factoring includes its own credit cover.
Is trade credit insurance worth it?
It suits businesses that rely on a few large customers, exporters selling where checks are harder and companies whose lenders ask for it. Compare the premium with your expected bad debts and with what one large insolvency would cost you. The insurer's limits are useful information too, because a reduced or cancelled limit is often an early sign that a customer is in trouble.
Insurers expect overdue accounts to be chased and reported on time. Sunbay connects to your ERP or accounting system, sends reminders by email and SMS before and after the due date, keeps every reply and promise to pay next to the invoice and shows overdue balances by customer in its analytics view, so accounts close to your policy's reporting deadline are easy to spot. When a debt has to go further, Sunbay prepares a case pack with the invoice history for a law firm.
Frequently asked questions
How much does trade credit insurance cost?
The premium is usually a percentage of the turnover you insure, with a minimum premium. The rate depends on your sector, your customers' risk, where they are and your own bad debt history, so compare quotes for the same cover.
Does trade credit insurance cover disputed invoices?
Usually not until the dispute is settled in your favor. That is one reason to resolve disputes quickly and keep a record of every customer reply.
What is protracted default?
It is a claim for a customer that has not paid but is not insolvent. You take the collection steps the policy requires, report the debt by the deadline, and the insurer pays after the waiting period set in the policy.
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