Credit Insurance
A credit insurance is a type of business insurance designed to protect businesses from commercial and political risks that may impact the finances of the business. Such risks can be beyond the control of businesses or individuals.However, safeguarding against risks like loss or damage to the business is important to expand the business. Many national and private insurance companies in India provide credit insurance. This helps business owners overcome the loss due to customer defaults and in turn, improve quality, increase business profits, and reduce risks of unpredictable customer insolvency. It also protects exporters against any loss incurred during export of goods and services.
Credit insurance covers 2 types of risks – commercial and political risks.
Commercial Risks
- Insolvency of the buyer
- Non-payment by the buyer
Political Risks
- General moratorium on payment by the government of buyer’s country
- Cancellation of import license
- Political events, economic difficulties, legislative or administrative measures preventing payment
- Military or civil war, revolution, riot or insurrection
- Non-payment by government buyer
- Government decision preventing performance
Advantages of Buying Credit Insurance
Some of the benefits of purchasing a credit insurance are:
- It helps the businesses by protecting their account receivables or business sales that will be converted into cash soon, thereby, protecting the most important asset
- This type of credit insurance helps the businesses by providing an opportunity to the manufacturers and distributors whereby they can increase their sales to their existing customers and improve the cash pipeline with almost no risk on themselves
- It reduces risks of unforeseen customer insolvency or bankruptcy which could have created a cash crunch due to bad debts
- It also opens new avenues of business by adding new customers and supplying them with goods on credit basis, thereby, directly hitting the bottom-line for the success of any business
- Credit insurance helps businesses by improving the funding access at competitive rates and increasing the chance of getting finance from banks
- It helps policyholders to seek more information about customers and screen them regularly for a sound business environment
- It also keeps a proper balance if the credit insurance risk is originated by an employee of the organisation by covering them under a Rider option or a separate policy offered by the insurance companies providing credit coverage due to errors by employees