Trade credit insurance (TCI) is a type of insurance that covers the risk of non-payment by buyers of goods or services. It is a useful tool for financiers who provide funding to businesses based on their trade receivables. In this blog, we will explore how TCI can benefit financiers and what options are available in the market.
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2. Trade credit insurance (TCI) is a type of insurance that covers
the risk of non-payment by buyers of goods or services. It is a
useful tool for financiers who provide funding to businesses
based on their trade receivables. In this blog, we will explore
how TCI can benefit financiers and what options are available
in the market.
3. Why do financiers need TCI?
Financiers who offer trade finance solutions to businesses,
such as invoice discounting, factoring, or supply chain
finance, face the risk of default or delay in payment by the
buyers of their clients. This can affect their cash flow,
profitability, and credit rating. Moreover, if the buyers are
located in foreign countries, there is also the risk of political or
economic instability that can disrupt the payment process.
4. TCI can help financiers mitigate these risks by providing them
with a reimbursement guarantee in case of non-payment by
the buyers. TCI can also help financiers expand their portfolio
of clients and offer them more competitive terms and rates.
By having TCI in place, financiers can reduce their bad debt
provisions, improve their borrowing and financing options,
and increase their profitability.
5. How does TCI work?
•The financier obtains a TCI policy from an insurer that covers the
trade receivables of its clients.
•The financier provides funding to its clients based on their invoices or
other trade documents.
•The financier pays a premium to the insurer based on the turnover
and credit risk of the buyers.
•The financier monitors the payment status of the buyers and reports
any overdue or disputed invoices to the insurer.
6. •If a buyer fails to pay within the agreed credit period due to
insolvency, bankruptcy, protracted default, or political risk, the
financier files a claim with the insurer.
•The insurer verifies the claim and pays an agreed percentage of
the invoice amount (usually 75%-95%) to the financier.
What are the types of TCI policies?
There are different types of TCI policies available in the market,
depending on the needs and preferences of the financiers. Some
of the common types are:
7. Whole turnover policy: This policy covers all the trade
receivables of the financier’s clients, regardless of whether they
are domestic or international. This policy provides
comprehensive coverage and simplifies the administration
process for the financier.
Key buyers policy: This policy covers only selected buyers of the
financier’s clients who represent a significant share of their
turnover or pose a high credit risk. This policy allows the
financier to focus on its key accounts and tailor its coverage
accordingly.
8. Single buyer policy: This policy covers only one buyer of a
financier’s client, who may be a new or strategic customer.
This policy enables the financier to enter new markets or
sectors with confidence and offer attractive terms to its
clients.
Top-up policy: This policy covers only a portion of the trade
receivables that are not covered by another TCI policy or
credit limit. This policy enhances the existing coverage and
allows the financier to increase its exposure to certain buyers.
9. Who are the leading providers of TCI?
The leading providers of TCI include carriers such as AIG,
Zurich Insurance Group, Chubb, Coface, Allianz Trade, and
Atradius. The Export-Import Bank of India (EXIM), India’s
official export credit agency, also provides credit insurance
that protects foreign accounts receivable against insolvency
and political risk.
10. Conclusion
TCI is a valuable risk management tool for financiers who deal
with trade receivables. It can help them protect their cash flow,
enhance their profitability, and grow their business safely.
Financiers can choose from various types of TCI policies that suit
their requirements and preferences. To avail TCI, financiers can
contact reputed insurers or export credit agencies that offer this
service.