The sole purpose of any business is to make sure that the balance between the inflow and outflow of the cash in business is managed well. Depending only on cash transactions will hamper the volume of business, as high value business dealings are generally done on credit basis, that’s why need for credit based transaction is highly important. Here comes the role of Credit insurance, which helps in securing the credit transaction of any business unit against unforeseen bad debts. As important as cash transactions to a business is, credit transactions play a major role in maintaining the flow of business activities.
Credit insurance is an insurance policy and risk management product that covers the loss due to the non-payment of valid debt by the debtors as a result of protracted default, insolvency or bankruptcy. It is purchased by business entities to cover a portfolio of buyers and the insurance company pays an agreed per cent of receivables that are unpaid. Credit insurance not only gives the confidence to expand the business to existing and new market but also enables the company to sell on open account terms which is a major advantage for the exporters as well as importers. Also, trade credit insurance policy protects accounts receivable against non-payment risks. This policy helps the business unit in mitigating exposure to the credit defaults, having competitive edge on their counterparts by offering more competitive payment terms and financing its account receivable.
While providing the credit insurance to any business unit, the insurance company gathers all the relevant information about the business unit’s current as well as new potential customers, and provides that information to the business unit. It helps the business unit to grow in the market and can also enter the new market as per the information provided by the insurance company about their new potential customers. The risk information database as formed by the insurance company act as a supporting pillar to the in-house credit management system of the business unit.
The credit insurance policy works on pre-approval limit basis; the credit limit on each debtor needs to be requested by the business unit and the same shall be approved by the insurance company.
With a credit insurance policy, a business unit can have a better control and protect the company against loss arising due to bad-debt. It helps in minimizing the risk profile of business while exploring and developing new markets. Credit insurance provides business, the reassurance that the invoices will be paid even if their customers default, which is critical to protecting the cash flow of the business.
To conclude the topic, I would state that Credit Insurance is a mixture of art as well as science:
As an art, the credit insurer must be able to establish credibility with the buyer with his/her artistic mindset and spontaneous judgment of the situation. Converting it into a win-win situation requires skilful communication and that’s an art.
Comparing it to science, Credit Insurance policy’s guiding principle is the credit rating of the customers provided by the insurance company which is based on facts and studies whether to cover that particular customer or not.
As each business has its own ups and downs based on its business cycle which changes the credit limit and doesn’t remain constant over a period of time, due to which it has to go under different reinventions to make it suitable for each individual buyer. Therefore, the insurer must be creative and logical to convince its buyer through customization in policy and support it with the principles of credit insurance for the best interest of both the parties.