Credit Insurance Vs Letters of Credit: What Gives?

by John Elken | Sep 3, 2024 | Credit Insurance, Export Credit Insurance, Trade Credit Insurance

As often discussed in credit management circles, a sale isn’t a sale until the seller receives payment for the goods or services. How does a seller get paid? For short term sales, two of the most common forms of payment are a letter of credit or extending credit / open account. While both accomplish the same objective, there are significant differences between the options. The letter of is more secure for the seller, because the risk of default has been reduced, but can limit sales. Extending credit (open account) to the buyer increases the seller’s risk of non-payment, but because it’s advantageous to the buyer, can used as tool to facilitate sales. What if the seller could extend credit to buyers to generate sales while limiting risk of non-payment? The solution is credit insurance. Let’s look at both payment options in more detail.

What is a Letter of Credit?

A commercial letter of credit is a document sent from the buyer’s bank that guarantees the buyer’s payment to a seller will be received on time and in the correct amount. If the buyer is unable to make a payment due to the seller, the bank issuing the letter of credit will be required to make payment. In a volatile global economy, where there a longer transit times, less knowledge of the buyer, there are advantages to selling on L/C.

Seller advantages:

Buyer is assured payment
Terms of the sale are negotiated in the letter of credit document
Funds are transferred from the issuing bank to the seller’s bank

While there are advantages to the seller, there are disadvantages to the letter of credit itself and for the buyer.

Disadvantages:

Seller – It can be challenging to negotiate the key terms
Seller – Transactions details can be missed leaving room for error
Buyer – Letters of credit can be costly. The buyer bears the brunt of the fees which typically range from 75 bps in developed countries to 150 bps or more in underdeveloped countries
Buyer – Letters of credit tie up the buyer’s working capital. The bank will require the buyer to set aside the funds as a condition of issuing the letter of credit. This either reduces their borrowing capabilities or access to cash.

Letters of credit are an effective payment method assuring the seller is paid for goods or services. However, the benefits generally accrue to the seller, while there are a number of disadvantages for the buyer.

What is Credit Insurance?

Credit insurance is an insurance policy that protects the insured (seller) from non-payment. It allows the seller to extend credit (open account) to the buyer while reducing the risk of not being paid for their products or services. Credit insurance can be a win-win for both the buyer and seller.

Seller advantage:

Sell more. Extending credit makes it easier for your customers to buy your products. Financing is critical aspect of any sale. If your customer can get a better deal which includes credit from your competitor, you are at risk of losing the sale and your customer.
Credit insurers are very good at determining credit worthy buyers and credit limit to extend. If they make the wrong credit decision, the insured can file a claim for non-payment. That’s a huge benefit often overlooked when evaluating credit insurance options.

Buyer advantage:

Reduced borrowing costs
Improved working capital

The following graphically shows impact of the terms of sale on buyer’s willingness to buy:

Conclusion

Financing is a critical component of any sales transaction. Ideally, the seller would like to sell on secured basis, but for most cases this isn’t realistic. Companies are increasingly recognizing that credit insurance is a valuable tool in their overall enterprise risk strategy. They can extend credit to facilitate sales, and also reduce enterprise risk by protecting one of the largest assets on their balance sheet.

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provide value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring a complete understanding of policy wording and delivering excellent responsive service.

How to Use Credit Insurance for Business Development and Sales

by John Elken | Aug 27, 2024 | Accounts Receivable Insurance, Credit Insurance, Trade Credit Insurance

Credit insurance, also known as trade credit insurance or accounts receivable insurance, protects businesses from the risk of non-payment by customers. If a customer fails to pay due to insolvency, bankruptcy, or protracted default, credit insurance ensures that your business still gets paid. But beyond protection, credit insurance can be a catalyst for growth. At Securitas Global Risk Solutions, we help companies leverage credit insurance to expand their market reach and secure their cash flow.

How Credit Insurance Boosts Business Development

Expanding into New Markets

Opportunity: Breaking into new markets often involves dealing with unfamiliar customers and credit risks.
Solution: With credit insurance, you can confidently extend credit to new customers, knowing that your receivables are protected. This opens up opportunities in both domestic and international markets.
Impact: Increased sales and market share in new regions without compromising financial security.

Enhancing Customer Relationships

Opportunity: Offering favorable payment terms can strengthen relationships with key customers.
Solution: Credit insurance allows you to offer more competitive payment terms, such as longer credit periods, without increasing your risk exposure.
Impact: Improved customer satisfaction, loyalty, and repeat business, leading to higher sales.

Supporting Aggressive Growth Strategies

Opportunity: Rapid expansion requires bold moves, including taking on higher levels of credit risk.
Solution: Credit insurance backs your aggressive growth strategies by covering potential losses from non-payment, giving you the confidence to pursue larger deals and contracts.
Impact: Accelerated revenue growth and the ability to scale your business more quickly.

Facilitating Access to Financing

Opportunity: Expanding businesses often need additional financing to fuel growth.
Solution: Credit insurance makes your accounts receivable more secure, which can make it easier to obtain financing from banks and other lenders.
Impact: Improved cash flow and access to working capital, enabling you to invest in new opportunities.

How Credit Insurance Drives Sales

Increasing Sales to Existing Customers

Opportunity: Selling more to your current customer base is one of the easiest ways to grow.
Solution: Credit insurance allows you to confidently increase credit limits for your existing customers, leading to higher sales volumes.
Impact: Maximized revenue from existing relationships, with the security of insured receivables.

Winning New Customers

Opportunity: Attracting new customers often requires offering attractive credit terms.
Solution: With credit insurance, you can extend credit to new customers with confidence, knowing that your potential losses are covered.
Impact: Growth in your customer base and increased sales without taking on undue risk.

Reducing Bad Debt Reserves

Opportunity: Bad debt reserves tie up capital that could be used for growth.
Solution: Credit insurance reduces the need for large bad debt reserves, freeing up capital to reinvest in sales and business development initiatives.
Impact: More available capital for growth and less financial strain from bad debts.

Building a Competitive Advantage

Opportunity: In competitive markets, offering superior credit terms can set you apart.
Solution: Credit insurance enables you to offer better credit terms than competitors, attracting more customers and securing more sales.
Impact: A stronger market position and higher sales through differentiated offerings.

Conclusion

Credit insurance is more than just a protective measure—it’s a strategic asset for business development and sales growth. By securing your receivables, you can expand into new markets, offer competitive terms, and pursue aggressive growth strategies with confidence. At Securitas Global Risk Solutions, we specialize in helping businesses harness the full potential of credit insurance to drive success. Contact us today to learn how we can support your growth with tailored credit insurance solutions.

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provide value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring a complete understanding of policy wording and delivering excellent responsive service.

Core Components of a Trade Credit Insurance Policy

by John Elken | Jul 31, 2024 | Accounts Receivable Insurance, Credit Insurance, Export Credit Insurance, Trade Credit Insurance, Trade Insurance

The policy specimen, declarations, endorsements, and buyer credit limits are the main components of a trade credit insurance policy.

Policy Specimen

Policy Specimen is the Insuring Agreement between the Insured and the Insurer and details the requirements of each party. It will include the coverages, requirements of an insured receivable, any exclusions, the claim filing period, and the timeline for claim settlement.

Policy Declarations

The Declaration page includes the policy terms. The terms are often developed based on the application information submitted to the insurer. Key terms include:

Sales Basis: If the premium is based on forecasted sales.
Premium Rate
Insured Retention: Either through deductible or coinsurance.
Policy Limits
Specific Terms: Related to reporting and claim filing requirements.

General vs. Specific Endorsements

General Endorsements: A state requirement is an example of a general endorsement and would be included in all policies.
Specific Endorsements: Based on the Insured’s credit and sales procedures. If the insured sells on consignment, the consignment endorsement should be included in the policy endorsements.

Buyer Credit Limit Endorsements

Buyer credit limit endorsements are the established maximum amount of credit that can be extended to individual buyers or groups of buyers, providing a clear framework for credit management.

Detailed Components of Policy Specimen

Coverage: Specifies the types of risks covered, such as insolvency of the buyer, protracted default, and political risks, ensuring that businesses are protected against various scenarios that might lead to non-payment.
Claim Process: Outlines the procedure for filing a claim, including required documentation and timelines, providing clarity on how to proceed in the event of a loss.
Exclusions: Lists specific situations or conditions that are not covered by the policy, setting clear boundaries for what is and isn’t covered.
Obligations of the Insured: Specifies the responsibilities of the policyholder, such as credit management practices and reporting requirements, ensuring that both parties understand their roles.
Indemnity Period: Defines the time frame within which a claim must be filed following a loss event, ensuring timely processing of claims.
Dispute Resolution: Details the process for resolving any disputes that may arise between the insurer and the policyholder, providing a clear path to address disagreements.

Policy Declarations

Policy Limits: Define the maximum amount that can be claimed under the policy, helping businesses understand the extent of their financial protection.
Deductible/Retention: The amount the policyholder must bear before the insurer pays out, ensuring that the insured retains some level of risk.
Premium: The cost of the insurance, usually calculated as a percentage of the insured receivables, which is a crucial factor in determining the overall cost-benefit analysis of the policy.

Understanding these components helps businesses effectively utilize trade credit insurance policies to protect against potential financial losses due to non-payment by buyers.

Disclaimer:

This blog post is meant to be informative and provide helpful tips and insights into credit insurance policies. It is not meant to supersede any policy requirements. Please consult your credit insurance policy for all requirements including claim filing deadlines and required documentation.

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provide value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring a complete understanding of policy wording and delivering excellent responsive service.

How (and When) to File A Claim for Late Payments

by John Elken | Jul 16, 2024 | Credit Insurance, Trade Credit Insurance, Trade Insurance

We are often asked when should the insured file a claim for non-payment? And what documentation is needed as part of claim submission?

Trade credit insurance policies provide coverage for two types of credit losses: Protracted default (slow-pay) and Insolvency (Insolvency is broadly defined, but most would recognize Chap 11 filing). When to file a claim is straightforward as trade credit insurance policies clearly spell out the claim filing timelines for both protracted default and insolvency.

Let’s review when to file a claim first, and then claim filing documentation.

Protracted default / Slow-pay

The insured has a customer (referred to as a buyer) that is experiencing financial difficulties. The buyer doesn’t dispute they owe the insured for the outstanding amounts, and wants to pay, but doesn’t have the ability to pay.

Following are a few reasons a buyer may not be able to fulfill their obligations to pay:

Sales have declined due to overall economic conditions or
The loss of a large customer
One of their customers is not paying them
Lost bank financing
Increased interest payments due to leverage
Fraud / mismanagement

Policy Timelines

Claim filing timelines vary by policy, but generally provide a window up to 180 days from invoice date. This is 150 days past due on 30 day terms of sale. If the terms of sale are greater than 30 days, the claim filing window could be longer.

When to File a Claim

The debt is within the claim filing window specified in the policy and you’ve exhausted your internal efforts to collect. One of the non-negotiables for the insurer is late filing a claim (missing the window to file the claim). The insured might be able to request a claim filing extension if the debtor is making payments, providing the debtor more time to pay. The claim filing extension still has to be requested in the claim filing window. If approved, this allows the insured to still file a claim if the debtor stops making payments or defaults on payment plan.

Insolvency

The claim filing window for insolvency is generally 10 – 20 days after receiving notification of the filing. In addition to filing the claim, some insurers may require the insured to file a Proof of Claim with bankruptcy court. If not required, the insurer will file the Proof of Claim on the insured’s behalf. The insurer will settle the claim per the amount reflected on the Schedule F.

Documentation

The claim filing documentation usually includes copies of purchase orders, contracts of sale, invoices, an aging report, bill of lading and/or proof of delivery, and in some cases the insured’s collection efforts. The documentation has to be consistent, meaning it’s clear that the debtor ordered the products/ services (P.O’s or contracts), the product was delivered / service preformed (BOL / POD), the insured invoiced the debtor (invoices), the debtor is past due (aging report) and possibly collection efforts. As part of the claim settlement process, the insured assigns their right to the receivables to the insurer. The insurer will then try to effect recovery (protracted default / slow-pay). Claim settlement will be delayed if required documentation is missing or unclear.

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

Disclaimer:

This blog post is meant to be informative and provide helpful tips and insights into credit insurance policies. It is not meant to supersede any policy requirements. Please consult your credit insurance policy for all requirements including claim filing deadlines and required documentation.

What Credit Insurance Brokers Can Do for Your Business

by John Elken | Jul 16, 2024 | Credit Insurance, Trade Credit Insurance, Trade Insurance

1. Key Benefit

Unlike a captive agent who represents one insurer, trade credit insurance brokers are independent and have access to all trade credit insurance companies. This flexibility allows the broker to meet your specific customer needs and give the best available options. A broker is unbiased and recommends the best available solutions.

2. More Competitive Rates

A broker capitalizes on its large network of insurers to negotiate terms that meet your budget. By working with a broker, you are assured of cost-effective trade credit insurance solution. By working with multiple carriers, the broker can provide competitive rates that match your financial needs. This means your organization can control costs without sacrificing the quality of coverage.

3. Client-Focused Support

Trade credit insurance brokers offer customer service that caters to all the matters clients raise. To ensure the customer support mechanism is working for you, the kind of support available is fast and effective throughout all your journeys with the insurer. This personalized support ensures long-term trust and reliability.

4. Clear Understanding of Policy

Brokers ensure that you get clarity and precision in the details of a trade credit insurance policy. Such clarity will help you understand what is being covered and eliminate gaps in your insurance coverage.

5. Timely Claim Payments

A credit insurance broker works with diligence to ensure that claims are settled in timely matter. Their expertise in the claims process assures timely satisfaction of the claims process. Your broker’s role is to advocate on your behalf throughout the process.

6. Highly Rated Insurers

Trade credit insurance brokers provide peace of mind knowing the coverage they offer is backed by reputable financially strong insurers. This financial stability supports the payment of claims and protects your business.

7. Flexible Policy Options

Brokers offer coverage that is specifically designed for the insured, giving you the assurance that the unique aspects of your business are considered. By personalizing coverage options, you are able to mitigate risks that might be unique to your business or the industry. A customized trade credit insurance policy creates value that is more aligned to supporting your business objectives.

8. Misconception of Cost

A myth is that brokers add costs. Actually through the creation of a competitive process, the insured will be confident they are getting the best pricing and coverage options. Market competition by a broker offers a wider variety, hence getting better terms than an agent might be able to provide.

9. Regular Policy Reviews

Regular policy reviews ensure that your coverage reflects your changing business needs and any changes in the market. Such reviews identify gaps or areas of policy improvement. Still, being proactive in updating your policy ensures protection from a wide range of potential risks.

10. Key Market Insights

Trade credit insurance brokers provide you with insights into the trends and changes in the market, ensuring that you are informed about critical market changes. This broad industry knowledge helps the insured assess potential risks and opportunities.

11. Claim Advocate

The brokerage will provide you with full support during the claim process, ensuring that the claim will be settled per the terms of the policy. Personal responsibility reduces your stress and ensures a support system. Their expertise in taking care of claims can be trusted with professionalism and care.

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

Top 5 Benefits of Trade Credit Insurance

by Peter Seneca and Kirk Elken | Feb 21, 2023 | Trade Credit Insurance, Trade Insurance

How does trade credit insurance work?

Trade credit insurance is a type of insurance that protects businesses from the risk of non-payment by their customers. It works by providing coverage for losses that result from a customer’s failure to pay for goods or services delivered by the insured business. The insurance company assesses the creditworthiness of the business’s customers and sets credit limits for each customer. If a customer fails to pay, the insurance company will cover the insured business for a percentage of the loss, typically between 75% an 95% of the amount owed. The cost of trade credit insurance is typically based on the insured business’s sales volume, the creditworthiness of its customers, and the level of coverage desired. Five benefits of trade credit insurance include the following:

1. Facilitate Sales

Open account credit terms can facilitate sales by making it easier for customers to purchase goods or services from a business. With open account credit terms, the customer is allowed to purchase goods or services on credit and pay for them at a later date, typically within 30 to 90 days. This can be particularly attractive to customers who may not have the funds to pay for the purchase upfront, but who are confident they will be able to pay within the credit term period. By offering open account credit terms, businesses can attract more customers and increase sales volume. However, it is important for businesses to assess the creditworthiness of their customers and manage their credit risk appropriately to minimize the risk of non-payment.

2. Protect Against Credit Losses

Credit insurance protects the insured from credit loss by providing coverage for losses that result from a customer’s failure to pay for goods or services delivered by the insured business. The insurance company assesses the creditworthiness of the insured’s customers and sets credit limits for each customer. If a customer fails to pay, the insurance company will cover the insured for a percentage of the loss, typically between 75% and 95% of the amount owed.

In other words, if the insured experiences a credit loss due to non-payment from a customer, they can file a claim with the insurance company, and if the claim is approved, the insurance company will reimburse the insured for a portion of the loss. This helps to protect the insured’s cash flow and balance sheet, and can help them to continue operating their business even if they experience losses from non-payment by customers.

It is important to note that credit insurance policies typically have exclusions and limitations, and the insured must comply with certain terms and conditions in order to be eligible for coverage. Additionally, the insurance company will typically require the insured to maintain appropriate credit management procedures and documentation to help minimize the risk of credit losses.

3. Gain Access to Additional Working Capital

Trade credit insurance can help insured businesses gain additional working capital from lenders. This is because trade credit insurance provides protection against the risk of non-payment by the insured’s customers, which can improve the creditworthiness of the insured and make them a more attractive borrower to lenders.

When an insured business has trade credit insurance in place, lenders may be more willing to extend credit or offer better terms, as they have greater confidence that the insured will be able to repay the loan. This is because the insurance policy provides protection against the risk of non-payment, which reduces the lender’s credit risk.

In addition, some lenders may even require businesses to have trade credit insurance as a condition of obtaining certain types of financing. By providing additional protection against the risk of credit losses, trade credit insurance can help businesses obtain financing on more favorable terms, which can in turn help them to grow and expand their operations.

4. Buyer Credit Risk Evaluation

Credit insurers can help insured businesses evaluate the credit risk of their buyers. As part of the underwriting process, credit insurers typically assess the creditworthiness of the insured’s customers and set credit limits for each customer. This involves analyzing a variety of factors, such as the customer’s financial statements, credit history, payment behavior, and industry trends.

In addition to setting credit limits, credit insurers may also provide ongoing monitoring and reporting on the creditworthiness of the insured’s customers. This can help the insured to identify and mitigate credit risk more effectively, and can also help them to make more informed decisions about extending credit to new customers.

Some credit insurers may also offer other services to help insured businesses manage their credit risk, such as credit risk analysis tools, customer credit reports, and online credit monitoring services. By providing these services, credit insurers can help insured businesses to make more informed decisions about extending credit and manage their credit risk more effectively.

5. Leverage Insurers Global Underwriting Platform

Many credit insurers have global underwriting platforms that allow them to provide credit insurance coverage for businesses operating in multiple countries and regions around the world.

These global underwriting platforms typically involve a network of local offices and underwriters who are familiar with the local markets, regulations, and business practices in their respective regions. This allows credit insurers to provide more customized coverage and risk assessments for each individual market.

In addition to providing coverage for businesses in multiple countries, global underwriting platforms may also offer other services such as risk assessment tools, credit monitoring and reporting, and other resources to help businesses manage their credit risk across borders.

Having a global underwriting platform can be a significant advantage for businesses that operate internationally, as it can provide them with more comprehensive and effective protection against credit losses in a wide range of markets.

Securitas

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provides value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring complete understanding of policy wording and delivering excellent responsive service.

This article was generated by artificial intelligence and reviewed by Kirk J. Elken for accuracy.